Domestic bourses' valuation rises as M&As heat up

Global stock and commodity exchanges are in a consolidation mode. The year 2006 saw a high level of activity on the merger and acquisition (M&A) front and the current year is expected to see more deals being sealed.

Apart from a bullish M&A scenario, valuations of bourses across the world are also rising and India is no exception to this trend.

The domestic stock and commodity exchanges are among the most sought after in the world, going by the deals announced and expected to be announced in the coming days.

Despite a 5 per cent cap on single-entity investments, the Deutsche Boerse and the SGX picked up 5 per cent each in the Bombay Stock Exchange (BSE), valuing the stake at $910 million. Besides, the Asia's oldest stock exchange had to decline the offers from the London Stock Exchange, the Nasdaq and others.

According to the market buzz, the New York Mercantile Exchange (Nymex) is in talks with the MCX, the country's leading commodity futures exchange.

The MCX and its promoter Financial Technologies have floated the DGCX, a commodity exchange, in Dubai. The Nymex is also starting an exchange there and the MCX will be competing with the New York-based exchange, even while the Nymex may partner with the MCX in India.

The consolidation is unique in the sense that the same exchanges may compete with each other in some regions and become partners in others. Nobody wants to miss the India opportunity, whatever be the cost, says a market analyst.

The DGCX got valued for more than $1 billion in one-and-a-half years. The MCX is getting a similar valuation in little over three years. The BSE's valuation is about 40 per cent of the valuation of the National Stock Exchange (NSE) despite a lower turnover of the BSE compared with the NSE's turnover.

The reasons for very high valuations lie in the future potential of the exchanges in terms of likely increase in volumes, cross-selling of products and services and immense opportunities in global trading.

Mukesh Ambani, inaugurating the MCX in 2003, had said that commodity futures would mop up a turnover of $600 billion in the next 10 years.

Interestingly, in little over three years, the volumes of commodity exchanges have touched $850 billion and are set to cross the $1 trillion mark.

The high volumes have been recorded without the participation of FIIs, banks and mutual funds, which are not permitted to trade in commodity futures. Their entry, which is imminent, will see a faster growth in volumes and higher fees for the exchanges.

There is an equally huge potential in stock exchanges. Only 2 to 3 per cent of the population invests in stocks and it can grow manifold in the near future. Both the national exchanges will benefit from this growth and so will their fee incomes.

"Fee income in the exchanges is growing fast with the rising volumes and it is an attraction for international investors," said a senior executive of a leading stock exchange.

The domestic stock exchanges have some unique facilities such as depository services and clearing houses. Such facilities are not common internationally. This is also set to tip the scale in favour of the domestic bourses.

"One should not be surprised if depositories and clearing houses get outsourcing contracts from overseas exchanges in future," said a representative of a stock exchange.

"India has another advantage of the time zone," said an investment banker. If the companies listed on the NSE and the BSE are allowed to be listed on the foreign stock exchanges they are partnering with, such companies can virtually trade for 24 hours a day as Singapore opens very early compared with the Indian time, Germany's Deutsche Boerse closes after Indian exchanges shut and then New York starts trading.

Investors in Indian companies will hence get the benefit of trading in their shares throughout the day.