Knotty issues cramp BSE stake sale

The proposed stake sale issue by the Bombay Stock Exchange (BSE) is tangled in a web of issues even as the deadline for reducing members' stake to 49 per cent fast approaches.

The board of the exchange, which met on Friday, is meeting again tomorrow to sort out these issues. BSE has to complete the strategic sale and an IPO before the deadline of May 2007.

There is confusion over the role of foreign brokerage outfits, such as Morgan Stanley, HSBC, Merrill Lynch among others, which are members of the exchange. It is not known whether their stakes would be considered as foreign or Indian.

Because, under the Securities and Exchange Board of India (Sebi) rules, foreign stakes is restricted to 49 per cent - 26 per cent through foreign direct investment (FDI) and 23 per cent through foreign institutional investments (FII). "If their memberships are regarded as foreign, then we have a problem in our hands," said a source.

Also, no single entity can buy stake more than 5 per cent in an exchange, as per the rules.

An official in BSE clarified that all existing members of the exchange are and will be treated as domestic shareholders. Another issue relates to the Foreign Investment Promotion Board (FIPB) permission required for the FDI stake. This is likely to delay the process further and to complete the stake sale by May 2007 would be a very difficult task, sources said.

Yet another issue relates to the fact that Sebi was not in a position to extend the deadline as the demutalisation norms came through an act of Parliament.

"Any extension of deadline also should come from Parliament," the source explained. "We are going ahead with the plans to complete the process before the deadline," said a banker handling the issue. Another issue relates to the lower equity base of Rs 67.7 lakh for the exchange.

This is much lower than the Rs 3 crore required under BSE's own rules for the IPO.

"There is not much time even if the exchange is required to hike the capital base through a rights issue or even a bonus issue," said the source. Another issue relates to the pricing of the IPO. Currently, BSE has authorised equity capital of 50 crore of Re 1 each.

For an estimated valuation of Rs 500 crore, BSE needs to sell its shares at Rs 500 a share. It is not an easy task to get retail investors attracted into buying BSE shares at Rs 500 per share on a Re 1 face value stock, pointed out an analyst.

Even to complete the demutualision before May, shares of BSE has to be listed by end-April.

"This will require the issue to open in early-April or end-March, which is not considered suitable time for attracting retail investors," said a banker.