India's Markets Aren't Merely Emerging

February 26, 2007
Savita Iyer

Before information technology brought India's stock exchanges into the modern era--when securities trades, in paper form, took 15 or more days to clear and some inevitably never got accounted for--there was Harshad Mehta. He was a small-time broker who made good by seeming to move the Bombay Stock Exchange (BSE) in ways that worked magic for his clients--until April 1992, when Indian stocks crashed, dragging Mehta down with them.

It turned out that Mehta was a fraud who had managed to manipulate the Indian banking system and build huge positions in selected stocks, driving their prices up. But when he was called upon by financial institutions to return outstanding funds, Mehta had to liquidate his positions. Panic swept the markets, and Mehta was arrested.

That, experts say, sparked the beginning of the modernization of India's stock market and exchange system. Fifteen years later, this emerging market is characterized by technologically sophisticated exchanges on which 99 percent of all trades are electronic--an impressive figure by any global standard, said Sandeep Hebbar, a senior analyst in the Bangalore office of consulting firm Celent. Trading volume is only climbing as India's economy continues to grow and its financial markets mature.

Indian IT companies have built first-rate exchange systems and trading platforms, admired by peers the world over, Hebbar said. Each of the country's 22 clearinghouses, vertically integrated with a corresponding exchange, is electronically linked to one of two depositories, which in turn are connected to 12 or 13 banks, thereby enabling fully automated, straight-through processing.

The Mumbai-based National Stock Exchange (NSE), which leads the IT drive across India's system of exchanges, accounts for about 65 percent of all trades in the country, Hebbar said. BSE is second in size. Both are efficient, transparent and well run; they are not only structured and operate according to high corporate standards, but are also looking ahead to a future in which India will raise its visibility as an economic and capital markets power and become a key link in the developing, global chain of international securities marketplaces.

There is little doubt that international exchange consolidation is under way in earnest. U.S. and European markets are already closely integrated, with the New York Stock Exchange's parent, NYSE Group, merging with Europe's Euronext and partnering closely with the Tokyo Stock Exchange. India is also in play: NYSE and three other strategic investors announced last month that they were each taking 5 percent stakes in NSE (Securities Industry News, Jan. 15). The London Stock Exchange and Singapore Stock Exchange have also expressed interest in the Indian market.

There is more than mere empire-building in NYSE's gambit. Michael Henry, a senior executive for capital markets in Accenture's financial services practice in New York, noted, "NYSE has always been India's favorite listing. As soon as an Indian company wanted a listing overseas, it went to NYSE. To the extent that NYSE can form an alliance with NSE or BSE to create a compatible product on each exchange so members can trade as they want, that will be very beneficial to both." NYSE's overall strategy is based on the assumption that consolidation will leave two or three transnational, multi-jurisdictional, multiproduct trading hubs still standing, and the NSE stake, like the Euronext merger, is a prong in that strategy.