Jignesh Shah: Why discriminate against exchanges?

One of the most important vehicles of growth in any economy, emerging or developed, has been vibrant and sophisticated exchange marketplaces. Commodity exchanges serve as catalysts for the development of marketing services through assembling, warehousing, financing, pre-processing, transportation and merchandising, besides assisting in price discovery and risk management. The effective functioning of the exchanges also presupposes the development of spot markets with e-trading platforms and such amenities as warehousing, quality testing, assistance in financing and guaranteeing deliveries and payments. The genesis of such marketplaces in India began with the conventional broker-driven exchanges, which have today been transformed into state-of-the-art electronic and de-mutualised exchanges across all asset classes. The recent diktat of demutualisation was a welcome one as it separated the ownership and trading rights of an exchange, making it a neutral entity.

Having said that, exchanges are like any other corporate entities, expected to make profits and mobilise resources on their own, based on the quality of their balance sheet. The income from earlier exchanges was primarily from the sale of membership rights, which has now been transformed to providing a wider range of infrastructure services, indeed an entire ecosystem which generates revenue for the new generation exchange. They, however, continue to function as self-regulating organisations under a government-appointed regulator, which defines the policy framework and oversees its operation.

As in the case of exchanges, there are many companies in critical and sensitive verticals like banking, telecom, aviation, electricity and insurance, sectors that function under the eye of regulators like the RBI, Trai, the directorate general of civil aviation, CERC, and IRDA. In each sector, capital is an essential prerequisite for growth, and each of these verticals is allowed FII investments to the extent of 74-100 per cent of its issued capital.

In the case of banks, they typically raise 10 per cent as capital and leverage the remaining 90 per cent through external public deposits, undertake lending based on their internal business practices and develop their own risk management matrix to handle defaults from such lending. This industry is allowed a 74 per cent FII limit, and has glaring examples like ICICI Bank (its FII holdings are around 72 per cent), which have majority FII holdings and can be equated and classified as foreign banks themselves.

The telecom industry, to cite another example, serves an important and critical infrastructural need and is often perceived as a national security risk. This is allowed FII holdings of up to 74 per cent. The enormous success of Bharti Airtel would not have been possible but for the investment made by Singtel and Warburg Pincus (a Sebi-registered FII) at a time when Indian financial institutions were against taking exposure in telecom. Similarly, Jet Airways' majority shareholder is an NRI, again possible since the industry has a high FII investment limit. The same holds true of insurance, ports, power, roads and real estate.

Is the liberalisation of the economy and related reforms to be restricted to only these critical and sensitive verticals? Both securities and commodities exchanges serve an important infrastructural need as well, and are also effectively supervised by their respective regulators""Sebi and the FMC. Indeed, exchanges do not accept public deposits like banks, and do not hold large contingent liabilities like insurance companies, nor do they have access to confidential conversations as could be the cases with telecom companies.

In the Indian scenario, Press Note 4 of the ministry of commerce has outlined the guidelines for foreign investment and this does not prohibit or restrict FII investments in exchanges, thereby logically construing it to be under the 100 per cent automatic route. This logical thinking is also vindicated by the best legal brains that understand the law of this land. The RBI has written to the finance ministry seeking clarification on FII investment in exchanges.

Internationally, global commodity exchanges have started functioning 24x7, are being de-mutualised, and are being floated themselves on equity exchanges. Not only are the exchanges abroad going global, but mergers and acquisitions across borders are becoming common. The CBOT has initiated its foray into India and done a JV in Singapore. NYMEX has started an offshoot in Dubai. The NYSE has reverse-merged with Archipelago and has become NYSE group and acquired Euronext Liffe, the largest commodity and equity exchange of Europe. NASDAQ has made a hostile takeover bid for the LSE. All these exchanges are opening up and transgressing geographical boundaries to capture a larger slice of the pie.

In this technology-driven era of market ecosystems, an exchange marketplace getting listed is an imperative and logical way to grow. Once exchanges are recognised as profit-taking corporate bodies, their competitive efficiency ipso facto improves. At this rate, we in India will lose out on the early advantage that we have derived over the past three years in leveraging knowledge capital harnessed to create world-class exchange marketplaces. It may also not be too long before international exchanges set up their trading platforms in India. Before that happens, Indian exchanges need to become global. That calls for strategic investments from FIIs and others in Indian exchanges.

In India, however, the idea of de-mutualisation has taken two years, followed by another two to five years to adhere to that process, which is once again being questioned and policies being debated all over again. With this, foreign investors will despair and develop a negative perception, which will lead to a huge missed opportunity. Exchanges cannot, and should not, be treated like a cottage industry while global players race ahead on the track.

The author is the Managing Director and CEO of the Multi Commodity Exchange of India (MCX)