The markets regulator on Wednesday proposed to ease ownership norms for entities that plan to start new stock
exchanges in India, a move that may end the 16-year-long dominance of the National Stock Exchange (NSE), allow
entry of foreign exchanges, and lower the trading costs for investors.
Currently, NSE, BSE and Metropolitan Stock Exchange are the three nationwide bourses in India, with NSE being
the largest in terms of trade volumes both in cash and derivatives segments. Though BSE is Asia’s oldest bourse,
almost all equity derivatives business in the country happens on NSE’s trading platform.
The reason behind the migration of trading to NSE was the exchange’s better technology and the absence of legacy
issues that had plagued BSE. “The Indian securities market has witnessed dominance in trading and depository
space, raising concerns on the possibility of excessive concentration and institutional tardiness in quickly responding to the changing market dynamics which may have an adverse bearing on efficiency in trading, record-
keeping, supervision and risk management practices,” the Securities and Exchange Board of India (Sebi) said in a
Even though NSE has been dominating the exchange business, it has faced several technical glitches, causing
unexpected market crashes and losses to investors. Sebi is also probing a case of certain algorithmic traders unfairly
benefiting from priority access to the NSE platform.
A review is crucial to facilitate new entrants to set up stock exchanges or depositories, Sebi said.
The proposals, if implemented, will allow foreign exchanges to enter India either through joint ventures with a new
domestic entity or through mergers with existing stock exchanges. The proposed norms will also allow new
companies to acquire existing exchanges or facilitate mergers of existing exchanges and depositories.
This will increase competition, which in turn will lower the costs of trading for investors, attract more investors into
the equity market, and lower the membership and clearing fees for brokers and other trading members.
For setting up a new exchange, the promoter may hold up to 100% stake initially and then lower it to either 51% or
26% within the next 10 years.
If the promoter of such a new exchange or a depository launching or entering in India is a foreign entity, it may hold
up to 49%, to begin with. This can be brought down to either 26% or 15% within 10 years, Sebi proposed.
At present, Sebi norms mandate exchanges to maintain a 51% shareholding by the public and a total of 49% holding
by trading members, associates and agents. Foreign entities are allowed to hold up to 15% in domestic stock
Sebi said any person (domestic or foreign), other than the promoter, may acquire up to 25% shareholding in an
exchange or depository.
Also, at least 50% of the ownership of the exchange or the depository has to be held by entities who have an
experience of at least five years in areas of capital markets or technology related to financial services, Sebi proposed.
In the case of an existing exchange or a depository, any entity may acquire up to 100% shareholding and lower its
holding 51% or 26% in 10 years, Sebi said.
However, for an acquisition of more than 25% stake, prior Sebi approval will be required.
In such cases of acquisition, if the new promoter is a foreign entity, it may hold up to 49%, which can be brought
down to 26% or 15% in 10 years, Sebi said.
The regulator said that another dominant trend shaping the exchange and depository landscape is the emergence of
new technologies such as distributed ledger technology, artificial intelligence and machine learning.
“Several new fintech or techfin players have emerged in trading space in various jurisdictions, who are increasingly
deploying these disruptive technologies and challenging the traditional functioning of stock exchanges and
depositories (collectively termed as market infrastructure institutions, or MIIs),” said Sebi.
“A need is, therefore, being felt to forge a competitive landscape in MIIs’ space by facilitating new players, who may
like to challenge other MIIs in their already established domain, to set up MIIs or merge and acquire the existing
entities,” Sebi said. The existing norms not only inhibit entry of new players but also restrict the acquisition of
existing exchanges and depositories, especially due to a default pre-condition of dispersed shareholding at the
initial stage itself, which limits the upside gains for a potential entrant arising out of entrepreneurial capital.
Sebi has sought feedback on its proposals by 5 February.
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