Ownership of Exchanges in India

I participated in a discussion on the CNBC TV channel last night on the ownership of Indian exchanges. This issue has become controversial because of the reported desire of the government and the regulators to discourage Indian companies and foreign entities from becoming strategic investors in Indian stock exchanges

My views on this are very simple. It is far more important to ensure that the securities trading industry is highly competitive than to regulate the ownership of exchanges. Stock exchanges are highly capital intensive technology driven businesses which require deep pocketed investors who are willing to make the strategic investments required to grow the business. Any attempt to exclude deep pocketed investors tends to favour incumbent exchanges and perpetuate existing monopolies and duopolies. From the social point of view, this would be a most unfortunate outcome as it would lead to a less competitive and therefore less vibrant, less innovative and less investor friendly capital market.

Much has been written about the alleged conflict of interest that would arise if certain categories of investors were to become controlling shareholders of exchanges. It has been suggested that ownership by financial institutions is the best solution. I do not agree with this view at all. Almost any potential owner of an exchange is conflicted because of the pervasive role of stock exchanges in a modern market economy. Financial investors are among the most highly conflicted of all potential owners. Some of them own broking subsidiaries and it is surely absurd to get rid of broker ownership only to reinstate it through the back door. All banks and term lending institutions live in mortal fear of the capital markets disintermediating them out of existence. Sixty years ago, the conflict of interest between banking and capital markets was taken so seriously that the US passed the Glass-Steagal Act prohibiting banks from owning securities firms. That was surely silly, but the idea that they are the best possible owners of stock exchanges is even more silly.

It is only an anti capital market mind set that can think of financial institutions as preferred investors in exchanges. Unfortunately, that mind set is in abundance in policy making circles in India.

Posted at 2:19 pm IST on Sat, 4 Nov 2006         permanent link

Categories: corporate governance, exchanges

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