Speculation: Indian finance minister Arun Jaitley on a visit to New York last year © AP Photo/Richard Drew
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During a visit to New York last summer to woo US investors, Indian finance minister Arun Jaitley had his sales pitch interrupted at one event by loud complaints from an unhappy fund manager.

A delegate from Canada’s Caldwell Investment Management used the question and answer session after his speech to lambast Mr Jaitley over the Bombay Stock Exchange’s slow progress towards a public listing, complaining of “zero accountability” around the long wait for regulatory approval.

“I’m not sure that’s a question,” came Mr Jaitley’s terse reply.

The snippy exchange reflected the mounting frustration of foreign investors who bought stakes in India’s leading exchanges over the past decade to benefit from growth and liberalisation — only to find themselves unable to realise gains as the prospects of public listings were repeatedly pushed back.

In recent months, however, their vocal lobbying appears to have borne fruit. The BSE and its larger rival, the National Stock Exchange, have laid out plans for imminent listings after regulators shifted their stance.

The rush of outside investment began in 2007, soon after the government allowed foreign investors to buy stakes of up to 5 per cent in exchanges.

That January, NYSE Group, Goldman Sachs, private equity firm General Atlantic and a fund run by Japanese group SoftBank each bought 5 per cent of the NSE. Soon after, Deutsche Börse and SGX, Singapore’s stock exchange, each bought 5 per cent of the BSE, and were later joined by other foreign investors including Caldwell and George Soros’s Quantum fund.

The investors received a shock in 2010 when an official report recommended limits on the earnings of stock exchanges, and a prohibition of their listing on the grounds that an exchange “should not become a vehicle for attracting speculative investments”. The report set the tone for subsequent regulatory treatment of the subject.

A turning point came last December when the Securities and Exchange Board of India (Sebi) announced rule changes aimed at smoothing the path for exchanges to list. The BSE in June secured shareholder approval for a listing in which up to 30 per cent of existing shares will be offered for sale, at a reported valuation of about Rs43.7bn ($655m).

Also in June, the NSE said it would file a draft prospectus for its flotation by January. It has not given any indication of the size of the listing, but it was valued at Rs178bn in April when the state-owned development bank, IFCI, sold a stake to a Hong Kong investor.

The exchanges have not indicated any intention to raise new capital through the flotations, meaning their operations are not expected to be affected. While demutualising exchanges tends to bring greater transparency and efficiency, “the next step of being listed publicly is not going to be a quantum leap”, says Nick Ronalds, head of the equities division at the Asia Securities Industry and Financial Markets Association.

Even as it appeases one group of investors, the regulator has made clear its willingness to take on another, increasingly powerful one: algorithmic traders, who now account for about 40 per cent of trading on Indian exchanges, according to Sebi.

Both major exchanges have invested heavily in attracting high-frequency trading, using technology to reduce time delays and allowing traders to place their servers next to the exchanges’ own, giving a tiny but potentially lucrative speed advantage. Last October the BSE claimed to have achieved an average order response time of six microseconds, shorter than any other global exchange had reported.

But a scandal emerged last year when an Indian website reported a whistleblower’s claims that NSE employees had illegally transmitted data to high-frequency traders. The NSE lost an ensuing libel case, and the heightened scrutiny of the activity culminated this August in Sebi’s proposal of a set of rules for algorithmic trading that would be, in some respects, the toughest in the world. Mooted measures include a minimum “resting time” before orders can be cancelled, and “speed bumps” that would impose delays on trades at random.


Proportion of trade on Indian exchanges accounted for by algorithmic traders

The document prompted a lengthy response from the FIA, a lobby group for the derivatives industry, which warned of “potentially detrimental impacts to market liquidity, increased risk and increased trading costs for investors”.

Just as in the flotation of the exchanges, investor lobbying on this issue is likely to work, says Suresh Swamy, a partner at PwC in India, who notes the present government’s concerted attempt to improve foreign investor sentiment towards India’s policy environment.

“Sebi has become more and more responsive,” he says. “I don’t expect them to do anything in haste.”

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