Foreign institutions may get to buy stake in exchanges ahead of listing

Govt Likely To Let Overseas Funds Purchase
Shares From Primary Shareholders

Shaji Vikraman & Ashish Rukhaiyar
MUMBAI
Oct 23, 2008

THE government is considering a proposal to allow foreign portfolio investors to buy into the equity of stock exchanges. The proposal now being vetted envisages foreign portfolio investors, or FIIs, being allowed to buy a stake in any of the stock exchanges from one of the existing shareholders through a secondary market transaction.

Earlier, at the time of framing the rules for foreign investment, the government and financial regulators had said an FII could pick up stakes in stock exchanges only through secondary market purchases. This was interpreted as permission to buy shares only after the listing of bourses. However, a sale by a primary shareholder to another investor could be construed as a secondary market purchase and not just listing and therefore, the government is set to allow such transactions, said a person familiar with the issue.

India allows foreign investment up to 49% in stock exchanges, depositories and clearing corporations with foreign direct investment of 26% and 23% in the form of foreign portfolio investment. After the rules were notified, many stakeholders made out a case to the government to revise it, saying investors needed more flexibility and comfort.

People familiar with the development say representatives of various stakeholders met with regulatory authorities, seeking more clarity on the issue. Apart from foreign stock exchanges, promoters and top officials of industrial houses, such as Bajaj and Aditya Birla have bought stakes in their personal capacity in the two Indian premier stock exchanges — NSE and BSE.

The proposed move to allow secondary market purchases by FIIs could provide stakeholders an exit option. “This is one of the core issues, especially for foreign shareholders,” says Majmudar & Co managing partner Akil Hirani. “The understanding that we had was that existing shareholders can sell their shares only in the secondary market. And with listing of Indian exchanges nowhere in sight, it was proving to be a major impediment,” he said.

Singapore Exchange (SGX), Deustche Borse and New York Stock Exchange (NYSE) are the three foreign stock exchanges, which hold equity stakes in Indian bourses. Morgan Stanley, Goldman Sachs, Merrill Lynch and Actis are some of the other global majors who bought shares of Indian stock exchanges in 2006.

For many, this was one of the two core issues that was acting as a roadblock in enhancing valuations of Indian bourses. Sebi has already addressed the other issue of a maximum limit for certain categories of shareholders. The limit has been hiked, including for foreign exchanges from the earlier 5% to 15%.