India sets ball rolling on IPOs of two stock exchanges

There is now little standing in the way of IPOs for the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) after the Securities and Exchange Board of India (Sebi) approved the listings on November 30. Shareholders in the two exchanges have long pushed for the floats to give them an exit option.

While not many changes are expected in terms the bourse’s day-to-day operations, the listings will raise the standard for transparency and corporate governance, said Vishal Yaduvanshi, a partner with law firm Luthra & Luthra. This is especially so because Sebi insists that the majority of the shares be held by the public.

Sebi had issued a framework for the listings in 2012, but that came with a number of caveats that hobbled the IPOs. This included the condition that all investors were “fit and proper”, which would have required the exchanges to individually vet each investors’ eligibility. Also, shareholders’ individual stakes were capped at a maximum of 15%.

But most of those issues were clarified by Sebi this week. For example, it is now putting the onus on investors to declare themselves fit and proper. It has also recommended that depositaries be used to check that an investor’s shareholding, and the parties acting in concert, does not exceed the 15% threshold.

Moreover, in a bid to put public shareholders first, the bourses will be required to offer 51% of their shares to general investors, meaning trading members and associates will see their holdings diluted to below 49%. A mechanism will be put in place to maintain this balance. 

“The IPOs are good for the market as it pushes the exchanges’ to be answerable to public shareholders, while giving them more agility to respond to changes in the market, and allowing them to have a dynamic approach to product development,” said Sudhir Bassi, an executive director with domestic law firm Khaitan & Co.

While Sebi has laid the foundation for the listings, it still needs to reveal the nitty-gritty of the changes, which will likely take three or four weeks to announce, reckons a market watcher. “And then the ball will be in the exchanges’ court to proceed with the listings,” he said.

Although the regulator has provided clarity on a host of issues, one thing it is not budging on is the rule that an exchange cannot list on itself, which means the NSE will have to seek a listing on the BSE and vice versa.

The bourses have opposed this in the past, saying it forces them to share confidential information with a rival. But the market watcher added that that point was moot now as all disclosures are made to the public.

However, the single biggest concern of market watchers for the two IPOs is that of an overlap between the commercial and regulatory roles of the exchanges, said Luthra’s Yaduvanshi. “They will need to clearly delineate these two functions once they are listed to avoid any conflict of interest,” he said.

Still, the listings are expected to make the exchanges more market-oriented and help them raise funds to update their infrastructure and stay ahead of the market, for example by forming partnerships with other exchanges and knowledge sharing, added Yaduvanshi.

And when it comes to the IPOs, which market sources reckon could happen next year or 2017, the NSE and BSE are unlikely to be benchmarked against other exchanges in the region as they are not direct comparables. Instead, they will probably be stacked up against each other, said a local lawyer.

“There is no question about investor appetite,” said a banker in India. “Both exchanges were valued in the billions of dollars years ago, so they will be significant in terms of size, although NSE is seen as the bigger exchange.”

Separately, Sebi also released a consultation paper to review its guidelines for issuing convertible securities in local currency, with a view to reviving issuance and creating an additional avenue for investors to invest, as well as for companies to raise funds.

Sebi is looking to consult the public on a number of problems, such as whether the price of convertible securities, including debentures and bonds, should be pre-fixed or market-linked, and whether the price should be determined based on bids received during bookbuilding.

“They are looking to broaden the market for non-vanilla products,” said a lawyer. “There is a lack of regulatory clarity at the moment on a number of matters involving rupee issuance of convertible securities. Sebi wants to get a feel of the market before fleshing out the details.”

While bankers see this as a step in the right direction, they also hope more will be done to encourage equity linked issuance offshore, which has been in dire straits. No Indian company has sold a CB this year, while only four firms issued dollar convertibles last year, the largest of which was a $200m deal by Larsen & Toubro.

Offshore CBs continue to be plagued by various regulatory issues, including the lack of a single overseeing entity. As convertibles carry elements of both equity and debt, they come under the purview of both the Reserve Bank of India and Sebi, although the former has more say.

CBs are also limited to a maximum tenor of five years, which complicates pricing as most of the equity-linked market are three year deals, said a CB banker in Hong Kong. And the longer the tenor, the harder it is to get to a bond floor of more than 90, especially if the credit is sub-investment grade, he added.

“Sebi’s consultation paper suggests willingness on the part of the regulator to open the convertible market to more than just the strongest credits, and any flexibility bodes well for issuance,” said the Hong Kong-based banker.