Moving on: employees walk past NSE’s electronic boards in Mumbai © Bloomberg
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Vikram Limaye took charge of India’s National Stock Exchange in July at an unusually turbulent time for the country’s biggest bourse.

His predecessor Chitra Ramkrishna resigned last December, amid a snowballing scandal over alleged preferential treatment for high-frequency traders, which is holding back the NSE’s long-anticipated flotation.

Under Ms Ramkrishna, the NSE energetically defended itself against the claims, pursuing a defamation case against the website that published them. But Mr Limaye recently dropped that lawsuit — reflecting his broader desire to reset what he calls a “high-handed” management approach that had alienated the exchange’s regulators, shareholders and customers.

“The NSE has come across as arrogant . . . it has to do with the direction from the top,” Mr Limaye says, in an interview at the exchange headquarters in northern Mumbai. “We want to come across as helpful rather than rigid.”

Founded in 1992, the NSE swiftly seized a dominant share of securities trading from the older Bombay Stock Exchange, revolutionising the market by setting up the country’s first fully electronic trading system. But cutting-edge technology lies at the heart of the problem that has threatened the exchange’s reputation.

In June 2015, the Indian news site Moneylife published allegations that the NSE had allowed preferential access to its systems for at least one brokerage engaged in high-frequency trading. Despite the NSE’s denials, the Securities and Exchange Board of India (Sebi) took the matter seriously, ordering it to commission a probe by an external auditor into the claims.

A few weeks after Ms Ramkrishna’s resignation, the results of that probe were revealed in the NSE’s preliminary prospectus for its planned public flotation. The auditors had “observed indications of potential preferential treatment to a few stockbrokers”, with “one particular stockbroker almost consistently connected first” to a less crowded server, helping it to receive price information crucial nanoseconds ahead of other traders.

Mr Limaye — who was previously chief executive of the financial group IDFC — says that there is no danger of the alleged problem recurring after the NSE’s switch to a “unicast” system, which ensures that all traders receive information at the same instant. “When everybody gets simultaneous access, there’s no question of who logs in first and all that,” he says.

Vikram Limaye © Bloomberg

But the NSE’s previous resistance to co-operating with Sebi — for which it has been publicly criticised by the regulator — appears to have cost the exchange, with the controversy a long-running distraction.

More than two years on from the initial allegations, Sebi is now conducting its own probe. Mr Limaye concedes that he has no way of knowing how long it will take, but he is appealing to the regulator to move swiftly. “This is an institution of national importance,” he says. “It’s in everyone’s interest that this gets resolved.”

For shareholders in the NSE, including Goldman Sachs and SoftBank of Japan, perhaps the most painful element of the scandal is the delay to the exchange’s public flotation. A flock of outside investors bought stakes in India’s major exchanges in the middle part of the last decade, anticipating that rules would soon be liberalised to allow them to liquidate their holdings through public listings.

After increasingly bitter complaints from these investors, regulators published new rules in December 2015 that opened the door to flotations by exchanges and paved the way for the BSE’s listing in February. But Mr Limaye concedes that the listing cannot go ahead until Sebi finishes its probe. As well as helping its restive shareholders, he notes, a flotation would enable the exchange to use its shares as currency for acquisitions, although it has no immediate need to raise equity.

Sebi itself was embroiled in controversy in August after it abruptly ordered the suspension of trading in 331 suspected “shell companies”, of which 48 were listed on the NSE. Several of the companies have responded with fierce protestations of their legitimacy as bona fide operating companies and have won court orders staying the regulator’s decision.

“Were they all shell companies? Probably not,” Mr Limaye says. But where critics have called the move evidence of regulatory clumsiness, Mr Limaye argues that it shows “the regulator is very focused on raising the standards of governance, because trust in markets is critical”.

Still, he is opposed to Sebi’s suggestion in the wake of the NSE’s high-frequency trading (HFT) controversy, of potential measures to curb the phenomenon, such as random “speed bumps” to delay HFT transactions. Most big markets have rejected the logic of such measures, he notes, calling HFT “an important part of the market”.

While its own flotation remains on hold, Mr Limaye says, the NSE is chasing growth in new areas such as listings of smaller enterprises. Over the past 18 months, its dedicated platform for such businesses has hosted about 80 flotations of “very small companies”, each typically raising about Rs100m ($1.5m) in capital.

Other potential areas of growth, he says, include the small commodity and currency markets, as well as the “underdeveloped” Indian corporate bond market.

The puny scale of the latter market reflects the traditional reliance of Indian corporations on loans from the huge state-owned bank sector to fund investment. But the weaknesses of that model have become clear in recent years, with a wave of corporate defaults eating into the capital of Indian banks.

This points to the vital role that India’s exchanges have to play in its future economic development, Mr Limaye says — as concerns mount over the country’s flagging economic growth rate, which fell to 5.7 per cent in the second quarter, its lowest level for three years.

“If we want to grow at a sustainable level like 8 per cent, I don’t think you can fund all this development through bank funding alone,” he says, noting the need for greater use of markets in areas such as infrastructure.

“Unless we get market development right, funding our growth could become a challenge.”

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