NSE, MCX in merger talks, could submit proposal to Sebi this month

The National Stock Exchange (NSE) and the Multi Commodity Exchange (MCX) entered into merger talks ahead of the implementation of the universal exchange framework in October, said a top official. The two entities are planning to approach market regulator Securities and Exchange Board of India (Sebi) as early as this month, according to the official.

 

The merger will help NSE and MCX cement their leadership position both in the equities and commodity derivatives space.

Both the exchanges have readied a blueprint for the merger proposal which will be discussed with Sebi. Sources say NSE entered talks with the commodity bourse soon after the market regulator allowed exchanges to dabble both in the equities and commodities space. The decision was taken by the Sebi board at its December 2017 meet.

 

NSE spokesperson said, “We will not comment on market speculations.” An query sent to MCX did not elicit immediate response.

 

Sources say that NSE which already has a strong hold in equity and index derivatives wants to be leader in the commodity segment as well.

 

“Commodity space is still evolving and has great opportunity to develop in the current scenario. So, having a dominant player will help bring in lot of economies of scale,” explained a person in the know.

 

In the equity derivatives space, NSE has near monopoly, while in commodity derivatives MCX enjoys a lion’s share of 90 per cent.

 

“It is premature to share any further details of the proposal, since talks are still in the preliminary stage,” said the official cited above.

 

Currently, MCX has a market capitalisation of Rs 37 billion. In comparison, NSE is much bigger. In December 2016, when NSE filed its offer document with Sebi, it was looking for a valuation of Rs 400 billion. Since then, the valuation has increased further thanks to a good uptick in trading volumes.

 

Market experts say the merger could be a win-win for both exchanges as competition is set up intensify post October as all existing bourses will look to foray into new segments.

 

BSE has already announced its aggressive plan to enter in to commodity derivatives and offered incentives to its members to start commodity derivative trading under same membership. The NSE is ready with its commodities plan but is yet to come out with details.

 

Being a commodity bourse, MCX will face tough competition from the equity exchanges, which arguably have much superior technology and client base.

 

On the other hand, MCX will need huge capital if it wants to aggressively foray into the equities space.

 

The proposal could also address NSE’s pet peeve–going public. Despite mounting shareholder pressure, NSE has not been able to list due to legacy issues. As MCX is already listed, the merger could lead to back-door listing for NSE, say experts.

 

“If the plan materialise, the merger will require approvals of the shareholders and creditors of both the exchanges. Also, this requires a principal nod from the Sebi and later National Company Law Tribunal (NCLT). Since it is the merger of two exchanges the both entity need to be in compliance with the Sebi’s Securities Contracts (regulation) (Stock Exchanges and Clearing Corporations) Regulations, said Sandeep Parekh, founder, Finsec Law Advisors.

 

NSE currently holds 15 per cent stake in NCDEX, a commodity bourse. Experts say the exchange may have to divest this stake if the MCX proposal goes through.