Indian bourses, both securities and commodity exchanges, are becoming the favourite hunting spot for foreign investors betting on the country's growth story. Foreign private equity, venture capital funds and other financial investors have picked up stakes in bourses in eight such deals in the last 12 months, with a disclosed value of more than $268 million.

Since the beginning of 2007, 17 such transactions (including consortium deals) have taken place with a disclosed deal value of more than $1.15 billion, according to VCCEdge, the financial research platform of VCCircle.

So, what is driving investments into these exchanges? "These are businesses which appeal to investors with long term horizons and have a 50 to 100-year growth stories. They can scale with little additional capital and are bets on the underlying economy," said Sohil Chand, managing director at growth and venture capital investor Norwest Venture Partners (NVP), talking about his firm’s investment in National Stock Exchange (NSE). NVP picked up a 2.11% of NSE for Rs 250 crore ($53 million) from IL&FS Securities Services, valuing NSE at Rs 11,925 crore ($2.5 billion) in June last year.

"Companies operating in the security and commodity exchange are limited since this space is regulated and are thus very unique," says Varsha Tagare, Director at Intel Capital, which recently invested in Multi Commodity Exchange of India Ltd (MCX), India’s largest commodity exchange.

"The other big barrier to entry is the volume of trading. Volume begets volume and hence exchanges with high volumes (with further growth potential) find favour with investors." said Bhavesh Shah, executive director, JM Financial Consultants Pvt. Ltd.

Nearly a year after the NVP deal, Singapore state investor Temasek Holdings picked up the 5% stake held by NYSE Euronext in NSE for $175 million, increasing the valuation of India's dominant stock exchange to $3.5 billion. "We see our investment in NSE as a good proxy to India's economic growth and the development of its capital markets," Manish Kejriwal, senior managing director at Temasek had said in a statement. NYSE Euronext, the world's largest stock exchange by dollar volume, bought the stake in early 2007 for $115 million as part of a strategic investment.

Most of the transactions involving these exchanges have been secondary in nature. The change in regulations also added to the spurt in secondary deals. The ministry of commerce issued a Press Note last year which stipulated that foreign investors cannot hold more than 5% stake in a local commodity exchange. In order to comply with this guideline, both Goldman Sachs and Intercontinental Exchange together sold a combined 5% stake in National Commodity & Derivatives Exchange Ltd (NCDEX) to Shree Renuka Sugars last year. A similar transaction took place in MCX where Fidelity International Ltd sold 2% each to Intel Capital and Passport India Investments (Mauritius) Ltd to bring its holding down to 5%.

Several of these transactions involved Indian shareholders cashing out as overseas investor interest gained momentum. In 2007, Indian institutions like IFCI, IL&FS, ICICI, PNB and GIC had formed a consortium to sell off 20% stake in NSE. This was mopped up by NYSE, Goldman Sachs, SAIF Partners and General Atlantic at a valuation of $2.3 billion with each player paying $115 million for a 5% stake.

"In markets around the world, there is typically one dominant player in this space," says Chand of NVP. Currently in India, NSE and MCX continue to dominate stock market and commodity space, respectively. And, by this virtue, they continue to be on top of investors’ lists. In the eight transactions in last 12 months, three involved MCX while two were in NSE.

But the lucrative exchange space continues to attract more players who are looking to increase their market shares. There has been a recent increase in interest in the Bombay Stock Exchange, the oldest stock exchange in Asia, under its new management.

BSE has, in recent months, attracted investors like US-based philanthropist George Kaiser's Argonaut Ventures and Canada-based Thomas Caldwell's Urbana Corporation. Other existing foreign investors in BSE include Deutsche Boerse AG, Singapore Stock Exchange and Dubai Financial Group LLC.

"The new and aggressive management team has dramatically improved the atmosphere and confidence within that organisation," said Urbana, which has stakes in exchanges across United States and Europe, in its annual report. "Although BSE is still weaker than its major competitor, we are of the opinion this organisation will provide better upside leverage from its current valuation and also that it be the first Indian exchange to proceed with an initial public offering (IPO)," it added.

Also, exchanges might create a niche for themselves going ahead, points out Shah of JM Financial. For instance, in the commodity space, while bullion and metals are largely traded on the MCX platform, NCDEX dominates agricultural items. But the Indian markets are still nascent stage for geographical and other niches to completely emerge, says Tagare of Intel Capital.

Most of the investors in the exchanges could be eyeing an exit through an IPO. MCX had filed for an issue before the downturn in 2008 but had to shelve its plans due to market conditions. There could also be an increase in secondary deals if the issues do not happen or investors need liquidity. "Assuming that the IPO does not happen, these investors might look at exit in favour of another PE or a strategic investor through a secondary deal," said Shah.

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