The largest exchange in India, National Stock Exchange (NSE) has an ambition—to launch its initial public offering (IPO) during this fiscal year. And there are many who are hoping to make money out of it. Old investors such as Norwest Venture Partners—who now own only a 1.58% stake—originally acquired a 2.11% stake in the company at a valuation of Rs 2,650 ($36) per share in 2009. And Johnny-come-latelys like NewQuest Capital Partners who entered the company in 2015 as old investors were losing patience. Among this latter group, one man stands out—Prashasta Seth, CEO at IIFL Asset Management. Seth has raised the largest pre-IPO fund in India. A whopping Rs 8,746 crore ($1.1 billion). And he’s betting big on NSE’s IPO, to the tune of nearly Rs 1,400 crore ($192 million).
IIFL started buying into NSE, albeit slowly since 2017. It currently owns 2.71% through its IIFL Special Opportunities Fund and each of its series, and once more in the last few months, it has increased its investment in NSE. By the end of December 2018, Seth expects his fund will hold nearly 3.20% in the company, though that will be the extent of its appetite.
While Seth has deployed Rs 4,797 crore ($657 million) from the fund across companies such as Bikaji Foods, Indian Energy Exchange, and Nazara Technologies among others, he’s parked nearly 16% of IIFL’s capital in NSE.
Sitting in a corner chair of IIFL’s headquarters in Kamala Mills, Mumbai, Seth is optimistic about his NSE bet. He says that he sees a huge potential upside to his investment. “Our fund has a lifeline of 3.5 years, and we think that all the issues that NSE is facing will be resolved in the next 6-12 months,” he says, explaining his rationale. Seth believes that IIFL’s investments will see a 30% upside from the levels at which they were bought and that the current market price factors in the delay in IPO.
While Seth declined to confirm the exact prices at which he has bought into NSE, back of the hand calculations based on shareholding data available with NSE and IIFL’s investment amounts indicate that, on an average, they have been acquiring shares at around Rs 830 ($11.37) apiece.
As SBI, IFCI, and PNB continue to sell their shares in NSE, new investors including HNIs are buying into NSE.
In addition, IIFL has invested Rs 1,000 crore ($137 million) in NSE-promoted NSDL e-Governance Infrastructure Ltd, a technology provider platform which works with government agencies. The fund has also invested little over Rs 150 crore ($20.5 million) in NSDL, a depository firm where, once again, NSE is a promoter in the firm. IIFL’s investment banking arm is one of the merchant bankers for NSE’s IPO.
Clearly, Seth is bullish on NSE’s prospects, both in terms of its IPO and otherwise. But the future is anything but clear for India’s largest exchange in terms of volume and value. Since July 2016, NSE has been involved in an investigation initiated by market regulator Securities and Exchange Board of India (Sebi). Sebi had directed NSE to carry out an investigation into allegations that its co-location facility was misused. Co-location refers to NSE’s service where it allows traders to keep their own servers in NSE’s data centre, allowing them quicker access to the exchange’s price feed and helping in the faster completion of trades.
The allegations led to the resignations of several top NSE executives, and, more importantly, put an end to NSE’s plans for a Rs 10,000 crore ($1.4 billion) IPO in December 2016. NSE was also ordered to park its earnings—Rs 1,197 crore ($164 million) as of the end of FY18—from the co-location business in an escrow account, pending the results of the investigation. With the case now dragging on into its third year, will the NSE IPO finally materialise, or will Seth join the likes of private equity funds who have waited in vain for the last decade for a lucrative exit?
The Business Of Exchanges
Exchanges primarily make money from the transaction charges and other services it provides to brokers and traders who trade on its platform. India has two large exchanges. One is the Bombay Stock Exchange (BSE), the oldest exchange in Asia. The other, far larger exchange is the NSE.
Both bourses deal in markets such as equity derivatives, interest rate derivative trading, exchange-traded funds (ETFs), currency derivatives, etc. The NSE, however, has the lion’s share of the derivatives market.
As of today, BSE shares trade at Rs 672.50 ($9.21) apiece, a far cry from its listing price in February last year. Back then, BSE shares had opened at Rs 806 ($11) apiece, going on to record listing gains of 34% to hit a high of Rs 1,006 ($14) a share. Since then, the BSE has recorded an increase in revenue, led by increased growth in its core operations. Its income grew on the back of services provided to corporates. It reported income of Rs 1,212 crore ($166 million) for FY18. According to Value Research, BSE’s post-tax profit stood at Rs 704 crore ($96.4 million) in FY18, as against Rs 264 crore ($36 million) in the previous fiscal year. Despite this, it has found it difficult to sustain its share price, at least in part due to a loss of confidence in equities markets.
The NSE, on the other hand, has an 87% market share when it comes to the capital market segment, which involves listing of companies and trading in their securities. In FY18, in the futures and options (F&O) segment alone, NSE had a daily billable turnover of Rs 85,434 crore ($11.7 billion), a jump of 33% from the previous year’s Rs 64,158 crore ($8.8 billion) for FY18, NSE posted a post-tax profit of Rs 1,461 crore ($200 million).
Although it has seen its business grow in the equity trading space, it has seen a significant drop in its debt platform. Between FY17 and FY18, it witnessed a 24.11% drop in the average daily turnover of its debt platform—decreasing from Rs 2,832 crore ($388 million) in FY17 to Rs 2,149 crore ($294 million) the following fiscal.
On top of this dip, there’s still the cloud of the Sebi investigation that continues to linger over NSE. Sebi has not indicated when it would be finished with the matter with a negative outcome hanging like a sword of Damocles over the NSE.
Sebi’s circular from 18 September seemed to lend hope to the notion that a resolution was at hand. In its circular, Sebi approved the framing of the Sebi (Settlement Proceeding) Regulations 2018. This provides for the settlement of proceedings under the securities law by issuing a settlement order which shall include monetary terms as well as possible non-monetary terms.
The specifics, however, remain unclear. “Sebi has notified broad parameters on settlement of issues, but the law is yet to be notified. Unless that happens, it is still unclear as to which direction the case is headed,” said a senior securities lawyer, who did not wish to be named.
In the meantime, its dreams of an IPO will remain on hold. Its earlier consent application in July 2017, seeking Sebi’s approval for an IPO, was returned on account of the ongoing investigations. Instead, Sebi has asked NSE to file the application once the investigations are over.
Reverse to go forward
The IPO isn’t coming in a hurry.
But Seth strongly believes that it isn’t too far away either. In fact, he believes it could potentially see the light of the day within a year.
But NSE isn’t just waiting and watching. It’s making moves in the meanwhile. According to two people familiar with the matter, NSE has already initiated talks with commodity exchange Multi Commodity Exchange (MCX) to merge and undertake a reverse listing. A reverse listing is one where an unlisted company merges with an already public listed company and is listed by virtue of the merger.
Both NSE and BSE have received their commodity derivative trading (COMMEX) licence. While BSE has already started its commodity derivative operations, NSE will only do so later this month. An acquisition of MCX, however, will provide NSE with a ready platform in the commodities business. However, three different fund managers The Ken spoke to opine that a reverse listing would result in capped valuations for NSE. A detailed email sent to NSE on Monday late night went unanswered.
“There is no clarity at present on NSE’s listing process. The reverse merger will allow them an opportunity for indirect listing, and the new business will open up daily volumes of nearly Rs 25,000-30,000 crore ($3.4-4.1 billion)through gold, silver, and other trades. Although a fresh listing for NSE would offer them better pricing and valuations, considering the situation they are in, this listing will help them in the long run,” said one fund manager.
One other advantage of a reverse listing is that it saves companies from filing their red herring prospectus. As a result, companies would not need to provide financial details for the last five years or disclose any investigations or scrutiny they have been the subject of, as well as other business risks that could jeopardise their valuation.
Seth declined to comment on any such speculation. However, he added that IIFL believes that a reverse listing would not lead to any capping in terms of NSE’s valuation. However, even without an immediate listing or reverse listing, NSE investors still have something to smile about.
In November 2016, shareholders of NSE approved a stock split wherein every company share with a face value of Rs 10 ($0.13) share would be split into 10 Rs 1($0.01) shares. Back then, shares with a face value of Rs 10 traded for up to Rs 3,600 ($49). After the stock split, says Sandip Ginodia of Abhishek Securities, the shares jumped in value and have risen ever since. Calcutta-based Abhishek Securities deals in unlisted and delisted shares.
NSE's share price in 2009 was Rs 2,650 apiece. It traded at Rs 3,600 in 2016. In the last two years, its share price has gone up by nearly 3x.
The new shares were trading for anywhere between Rs 700-750 ($9.6-10) in 2017, he recounts. Today, in the unofficial or grey market, shares of NSE trade for anywhere between Rs 925-950 ($12.67-13) apiece for retail buyers, with bulk transactions being concluded for Rs 850-900 ($11.64-12) per share.
With NSE’s prices shooting through the roof over the last two years, national banks look to raise capital through non-core asset sales have been quick to cash in. State-run lenders who invested in NSE are now looking to completely dispose of their stake in the company as NSE is one of the only counters which has provided them with easy exits and gains from the sale process. Just last month, state-run lender State Bank of India (SBI) initiated the process to offload its 3.89% stake in NSE and has hired consultancy firm EY to conclude the sale process. Even Punjab National Bank (PNB) has sold off its entire stake in the company, pocketing Rs 48.35 crore ($6.6 million) for its troubles. PNB sold its shares for Rs 879 ($12) apiece.
And interest in NSE is not running out. “Not only institutional buyers, but in the last six months a lot of retail investors have also been buying into the exchange [NSE] as they control over 80% of the market and continue to remain in the dominant position,” adds Ginodia. For those looking for a quick, comfortable exit, this is their best bet for a payday. For bigger players eyeing bigger gains, though, an eventual listing remains the ultimate dream.