When Three is Not a Crowd

MCX-SX will be India’s third major stock exchange, but in what way will it help solve problems of the Indian capital market?

MCX-SX will be India’s third major stock exchange, but in what way will it help solve problems of the Indian capital market?

NEWS OF MCX-SX, which was set up in 2008 as a trading platform for currency derivatives, having just acquired regulatory approval to operate as India’s third full-fledged stock exchange has left capital market players impassive. What explains this lack of enthusiasm? One reason could be the current market slump. New listings and trading volumes on the two existing bourses—Bombay Stock Exchange (BSE) and National Stock Exchange (NSE)—are abysmally low these days, and almost nobody has an interest in a further fragmentation of this business. Another is that few expect the entry of MCX-SX to change much for the cause of equity. “It is stepping into a space where the NSE is well-entrenched,” says Vivek Sharma, executive director at Ernst & Young.

In 1993, the NSE’s debut had transformed stock trading in India. With the efficiency of its all-India computer network, transparency of operations and openness of ownership, it shook the country’s equity market up. As many as 19 regional exchanges shut down, while the BSE, which back then was a closed club owned by its member brokers, was pushed to corporatise itself, throw its shares open to investors at large and reform its working in several ways. While speculative excesses are admittedly still rampant, India’s market for equity capital is relatively better placed to do its core job: boost the economy, that is, by ensuring that investment money reaches the most effective deployers of it.

To succeed, MCX-SX, partly promoted by the Multi Commodity Exchange, will have to distinguish itself sharply. “Convincing people, companies and big investors to trade on its platform would be a daunting task for the new player,” says Basant Maheshwari, who runs The Equity Desk, an online forum. MCX-SX has been losing money on currency derivatives on account of ‘the predatory zero [transaction fee] pricing policy followed by competitors [NSE and BSE]’, as its annual report notes. The approval grants MCX-SX a chance to broaden its “service bouquet”, says Maheshwari. But even this may not help it achieve profitability anytime soon.

All that MCX-SX has revealed so far is that it plans to ‘offer Indian investors a choice of products and services suited to their risk profile’. According to Sharan Lillaney of Angel Broking, its aim is probably to achieve success five years ahead, by when “the direct participation of Indians in the capital market is expected to rise significantly [from a mere 2 per cent now]”. As India’s middle-class prospers, more and more citizens would want some of the profits generated by the corporate sector. What these multitudes lack as investors is the confidence that money can be made off shares fairly and squarely.

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Shailendra Tyagi