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Jalan Report May Put An End To PE Party At Bourses

25 November, 2010

In one stroke, the Bimal Jalan committee report on working, ownership and regulation of stock exchanges in the country could become a dampener for investors having or looking at a position at equity (and commodity bourses in future).

Investors feel the report could harm India’s investment climate and erode more than $1.2 billion invested in the various exchanges by private equity firms.

While some experts have termed it as an effort that has gone too far, others have viewed it as a balanced analytical report and its recommendations are necessary in fixing various issues affecting the working of bourses in India and abroad.

In an interview to a business daily early this year, Mr Jalan, a former governor of Indian central bank RBI, had said, “There are a lot of legacy issues in terms of the working of stock exchanges and market infrastructure companies that we are looking into. We will make sure there is effective regulation and freedom at the same time. Regulations should not curb efficiency of market intermediaries to deliver.”

One of the more controversial aspects is the report’s contention on listing of the stock exchanges. The report, that is against following other nations including the US where the NYSE Euronext itself is listed on both New York as well as Paris, could diminish investment opportunities for private equity investors in particular as it would take out one possible route to liquidity.

Sample the highlights of the Jalan report:-

–Exchanges to remain unlisted entities

–They can have financial institutions or banks as anchor investors who could own upto 24% (against maximum 15% currently) provided they have a net worth of at least Rs 1,000 crore and dilute holding to 15% in 10 years

–Restraining compensation of exchange’s management

–Ban on board membership of any trading or clearing member

–Number of public interest directors (PIDs) should be equal or more that those representing the shareholders.

“The recommendations do not do anything to benefit the exchanges besides the fact that they are killing competition, creating monopoly, hindering innovation and taking steps that are contrary to any exchange in the world,” said a private equity investor, on the condition of anonymity.

Bourses (including stock and commodity exchanges) and depositories have attracted private equity funding in excess of $1.2 billion since 2006, according to VCCEdge. Some of the investors in exchanges include PE majors like General Atlantic LLC, SAIF Partners, Goldman Sachs, Actis LLP, Citi Venture Capital International, Morgan Stanley Private Equity Asia, George Soros’ Quantum Fund, among others. 

To be fair, it is not a cul de’ sac. Investors have flocked to buy equity in exchanges old and new even as they are currently unlisted entities. Singapore’s sovereign wealth fund manager Temasek Holdings had picked up 5% in National Stock Exchange of India. Although the details were not disclosed, it was rumoured that it bought for $150 million from NYSE Euronext which, in turn, exited its investment in one of the country’s two big national equity exchanges. Aditya Birla PE has a minority stake in BSE among a slew of other PE investors in the space.

However, one can argue they invested in the first place with the firm belief that at one time these entities will be listed on the exchange.

Net-net it means the report seeks to attract only long term investors to its fold and not the speculative kind. Indeed, the history of many PE investors in India have been a quite in contrast to the global industry with many firms operating as a short-term portfolio investor though not necessarily like a hedge fund.

In this context, a future provision that equity bourses will not be listed will mean these financial investors will only have the option of seeking buyers to exit their investments. This brings down the attractiveness of such investments. The question is how much of these recommendations based on the views of the committee that also included Kishor Chaukar (managing director of Tata Industries) and Uday Kotak (managing director of Kotak Mahindra Bank) will be implemented.

Investors and industry experts have also expressed reservations about the fact only bank and financial institutions can hold a 24% stake in exchanges.

“The Bimal Jalan committee report says that now only a financial institution or a bank with Rs 1,000 crore can babysit this baby (i.e. exchanges). Again it’s a very restrictive new window, which they have opened and it basically means that no new exchange is going to come up because of these restrictions,” Sandeep Parekh, former Executive Director at SEBI and founder of Finsec Law Advisors, told Moneycontrol.


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Jalan Report May Put An End To PE Party At Bourses

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