India’s exchange regulator causes alarm

Recommendations by a state-appointed panel over the regulation of stock exchanges in India are causing widespread alarm among investors and local bourses.

An 85-page report by a committee headed by Bimal Jalan, a former Reserve Bank of India governor, has proposed tough new rules restricting profits, ownership and executive payment and barring their public listing.

The report was commissioned by the Securities and Exchange Board of India, the stock market regulator, and has been put out for a public consultation that ends at the end of December.

Since the report’s release last month, some regional stock exchanges, hopeful of eventual public listings, have considerably dropped in investor appeal. Twenty one exchanges had opted for demutualisation, a decision that now may lead to uncertain outcomes if new regulation is introduced by the finance ministry.

Some critics warn that the proposals will set back the development of India’s capital markets at a time of fast paced economic growth.

JR Verma, a professor of finance at the Indian Institute of Management, called the recommendations a “backdoor nationalisation” of India’s booming equity markets.

“If these recommendations are accepted, we will extinguish the essential spark of dynamism that has given India a world class equity market,” he said.

“They would ensure that Indian exchanges never become pan-Asian institutions. Worse, Indian exchanges could even become completely unviable, if the business moves to exchanges outside India that may offer better service at more competitive prices.”

Writing in the Financial Times, Patrick Young, chairman of UK-based Derivatives Vision, a securities exchange advisory company, said the proposals were “deeply worrying” and would lead to Indian exchanges losing out to international competitors.

He said they would serve as “regulatory sabotage” that risked reversing the gains made by prominent Indian exchanges like the National Stock Exchange, the Bombay Stock Exchange and a number of smaller exchanges over the past decade.

“Allowing free and open operation and ownership of exchanges and clearing houses is a key aspect of the road map towards India being an open, international economy,” Mr Young said.

“Restricting the market infrastructure is neither a sensible way for India to develop its own economy nor is it a way to demonstrate that India is increasingly open to foreign investment.”

The growth in India’s capital markets has attracted foreign investment. Goldman Sachs, Softbank Asian Infrastructure Fund and Temasek, the Singaporean sovereign wealth fund, have invested in the NSE. Dubai Holdings, Deutsche Börse, Singapore Exchange and Argonaut, a private equity firm, have bought into the BSE.

Likewise, innovative Indian exchange technology has been in demand for other trading platforms in Africa, the Middle East and Asia.

An editorial earlier this month in the Economic Times, an Indian daily newspaper, warned that Mr Jalan threatened to take one of the most vibrant areas of the Indian economy back to a socialist era where it took years to get a telephone line and the choice of cars was restricted to outmoded Ambassadors and Fiats.

Mr Jalan, a highly respected former central banker, has argued that a cautious approach needs to be taken to Indian stock exchanges to protect the credibility of the capital markets in the fastest growing large economy after China. Market infrastructure institutions, he believes, should be considered as public utilities rather than companies seeking to maximise profits.