Foreign Investment in Indian Exchanges

I wrote a piece in the Economic Times on Monday about permitting foreign investment in Indian exchanges. I wrote:

The ownership of exchanges should be largely left to market forces with minimal regulatory intervention. The regulatory goal should be to ensure that the securities trading industry is highly competitive. The death of the trading floor and the rise of electronic trading platforms have completely changed the nature of exchanges.

From being cosy clubs, they have become complex businesses that are technology driven. In the process, they have also become highly capital intensive. The ability to respond to the demands of a highly sophisticated and global user base has become paramount. SEs and derivative exchanges now require investors with deep pockets and willing to make the strategic investments required to grow the business.

Any attempt to exclude such investors tends to favour incumbent exchanges and perpetuate existing monopolies and duopolies. From the social point of view, this would lead to a less competitive and therefore less vibrant, less innovative and less investor-friendly capital market.

We must welcome foreign investment in our SEs and commodity derivative exchanges as well as the exchange-like entities that trade currency and fixed income products. SEs and derivative exchanges enjoy very attractive valuations in global markets today and we must allow our exchanges to tap these global markets to raise capital. Foreign exchanges and other strategic investors could also help revive and strengthen the less well performing exchanges and thereby foster greater competition.

India’s position on foreign ownership should be the same as that of the Financial Services Authority of the UK which has stated: “We will be indifferent to the nationality of the owners or the managers of the London Stock Exchange, and will be concerned to ensure that the future operation meets our regulatory standards.”

We too should focus on strengthening our regulatory framework so that ownership of the exchanges becomes irrelevant. We must not allow the incumbent exchanges to wrap themselves in the flag and appeal to our xenophobia to block much-needed competition.

Posted at 6:56 pm IST on Wed, 29 Nov 2006         permanent link

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