Indian bourses face profit risks from proposal on clearing firms' structure

By Chiranjivi Chakraborty 

India’s two leading stock exchanges may see their profit drop should the nation’s stock-market regulator implement proposed changes to the ownership structure of clearing houses. 

 

The Securities and Exchange Board of India is seeking public opinion on a suggestion that the clearing shops diversify their ownership to become “independent, self-sufficient public utilities” in a bid to strengthen the stability of the market’s infrastructure, according to a discussion paper published on its website. That could impact earnings and costs at both the National Stock Exchange of India Ltd. and BSE Ltd., which separately own the country’s two biggest clearing corporations.

 

The regulator has proposed two means for the bourses to diversify their current ownership: a 100 per cent sell down of the holding in question or the initial offloading of a 49 per cent stake to current shareholders, with the exchanges’ ownership going down to 15 per cent over a period of time SEBI didn’t specify. The regulator favors the first option and seeks public comments by Dec. 13. 

 

The proposals are the latest setback for stock exchanges in India that are already facing a substantial hit to revenue from the implementation of stricter derivatives trading rules. In the six months through September, BSE’s clearing firm, Indian Clearing Corp., accounted for 19 per cent of the bourse’s net income, while NSE got about 17 per cent of its profit from its NSE Clearing Ltd., data compiled by Bloomberg show.

 

The regulator has also proposed that clearing firms find ways to enhance financial self-sufficiency through “a reasonable fee and operating structure” that does not result in increased costs for investors. NSE and BSE, whose clearing house fees already account for about one-quarter of their cost structure, may end up having to disburse more to those shops. 

 

The changes would affect the bourses’ margins at the product level, Jefferies Financial Group Inc. analysts Jayant Kharote and Prakhar Sharma wrote in a note. And for Mumbai-listed BSE, whose revenue has grown rapidly in recent years, the impact on earnings-per-share could be about 12 per cent to 15 per cent, they said.