No Exit for Investors as India Dithers on Stock Exchanges’ IPOs

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Toronto-based Caldwell Securities Ltd. chose India over China in 2007, buying about 5 percent of what was then the Bombay Stock Exchange. Eight years later, Chairman Thomas Caldwell is frustrated because he has few exit options.

The 140-year-old bourse, now renamed BSE Ltd., and its younger rival, the National Stock Exchange of India, haven’t yet sold shares to the public. Policy makers have long viewed the bourses as public utilities to promote an equity culture in the world’s second-most populous nation rather than as a business.

“We feel a bit like orphans who have got into a government-regulated utility,” Caldwell said in an e-mail. “There are an awful lot of confusing signals from the regulator and policy makers and it is more like an obfuscation, where everyone keeps pointing fingers at everyone else.”

Caldwell isn’t alone. The two exchanges are under pressure from other investors as well, including SAIF Partners, a Hong Kong-based private-equity firm and U.S.-based Norwest Venture Partners. They say an IPO leads to better valuations, corporate governance and provides access to finer technology apart from the cash-out option.

The investors aren’t in a hurry for no reason.

Cash Pile

The NSE, which counts Goldman Sachs Group Inc. and Tiger Global Management LLC among its investors, is sitting on a cash pile equivalent to 92 percent of its balance sheet, according to data from SAIF Partners. For BSE, the figure is 82 percent, compared with 3 percent for Intercontinental Exchange Inc., 29 percent for the London Stock Exchange and 14 percent for Deutsche Boerse AG, the data show.

Shares of Intercontinental Exchange trade on the New York Stock Exchange, which it oversees.

The NSE had an average dividend payout of 23 percent between 2011 and 2015 compared with 94 percent by Singapore Exchange Ltd. and 72 percent by Hong Kong Exchanges and Clearing Ltd., according to data from SAIF Partners.

“It is a bit of a hypocrisy if an exchange, while encouraging others to raise capital, improve governance standards and bring in better technology, doesn’t do the same itself,” Caldwell said. His firm has cut its stake in the BSE to 3.9 percent, according to the latest data.

Christopher Jun, a Hong Kong-based spokesman for Goldman Sachs, declined to comment when asked if the New York-based investment bank would support a share sale by the NSE. Tiger Global also declined to comment.

Hurting Sentiment

The government and the market regulator have long debated the impact of listing exchanges amid concerns they will lose control in the event of extreme volatility. State-owned funds hold strategic stakes in the bourses, while the government appoints its nominees to the boards.

IFCI Ltd., a state-owned project lender that owns 5.55 percent of NSE, made several attempts to pare down its stake but only got unattractive offers. Lack of IPO plans have hurt buyer sentiment, IFCI’s managing director Malay Mukherjee had said in May.

“Listing will lead to transparent price discovery and greater liquidity for existing shareholders,” said Sohil Chand, Mumbai-based managing director at Norwest Venture Partners, which owns 2.11 percent of NSE. “It will give retail investors an opportunity to participate in a stock that is a great proxy for the Indian growth story.”

NSE’s board and management will take the listing process to “its logical conclusion” whenever that happens, Spokesman Arindam Saha said by e-mail. “The rest is for the regulator and the market to decide,” he said. Ashishkumar Chauhan, chief executive officer of the BSE, declined to comment.

Valuation Estimate

The NSE handles about twice the volume of the BSE in the cash segment and has 80 percent share of India’s $33 billion a day stock-derivatives market. If the two exchanges were to sell shares, they could be valued at a combined $5.8 billion, 41 percent more than the valuation reflected in private, negotiated deals, according to estimates by SAIF Partners.

MCX Ltd., the nation’s biggest commodity futures bourse, has seen its market value surge 50 percent in the past year to about $854 million. The exchange is 15 percent owned by Kotak Mahindra Bank Ltd. and counts billionaire Rakesh Jhunjhunwala among its investors.

A public offering will force the managements to deliver a better performance and help improve their valuations, Ravi Adusumalli, a San Francisco-based managing partner at SAIF Partners, said in an e-mail.

“Transparency in an exchange is vital for a healthy economy,” Adusumalli said, adding he’s “tired” of excuses and delays.

Talks Revived

India’s policy makers this year revived discussions on allowing bourses to sell shares to the public.

Junior Finance Minister Jayant Sinha said July 1 that the government is considering listing stock exchanges, while the Securities & Exchange Board of India Chairman U.K. Sinha in April sought six months for revised rules. NSE plans to seek board approval for an IPO, Chairman Sunil Behari Mathur said in a phone interview on July 3.

A Sebi spokesman didn’t immediately reply to an e-mail and a text message seeking comments.

Caldwell, whose firm holds stakes in 37 exchanges around the world including the NYSE, said he wrote to India’s Finance Minister Arun Jaitley last month to push for a decision.

“We are hopeful of a substantive response from the new Modi government, which wants to attract foreign investment,” Caldwell said.