NSE-MCX merger – The setup

Instead of trying to sneak in via a merger with MCX, NSE must go public, warts and all, on its own to gain the investors' confidence

Team PGurus

April 11, 2019

Instead of trying to sneak in via a merger with MCX, NSE must go public, warts and all, on its own to gain the investors' confidence

The first two parts in this series, can be accessed here.This is Part 3.

SEBI and MCX were contacted for a comment and have not replied till now…

Talks of merger between National Stock Exchange (NSE), India’s largest equity exchange and Multi Commodity Exchange (MCX), largest commodity bourse – the two monopolies – is all set to revive soon aftermarket regulator, the Securities and Exchange Board of India (SEBI) comes out with its order in the learned-location scam.

PGurus has learnt that the merger, which is a “necessity” for some large shareholders of MCX and NSE, was mainly put on the back burner in 2018 due to NSE’s ongoing co-location matter, which could have given rise to legal hassles. But once SEBI order in the co-location scam is out, which is unlikely to be very harsh on NSE as an institution or never declare it not fit and proper, it may pave the way for the merger deal.

Read this story in Hindi

SEBI’s ostrich-like approach

Nearly 28 entities were served with a show cause notice in NSE co-location scam. As per a recent Hindu Business Line report, SEBI concluded its hearing into the co-location matter in March against those it had show-caused[1]. But even when the regulator is preparing its final order in the co-location matter against the nearly 28 entities, has the so-called ‘alert watchdog’ has looked into the happenings at MCX?

This is a matter that concerns one of the premier stock exchange of India, the NSE. If NSE wants to go public, it needs to do so on its own legs and not take a backdoor route by merging with an already public company

For instance, it has come to light that MCX too, like NSE, was sharing ‘data pipeline’ in 2016 with Indira Gandhi Institute of Developmental Research (IGIDR) linked to Ajay Shah and Susan Thomas[2]. MCX started providing a ‘date pipeline’ in late 2016 even while the NSE co-location scam that was highlighted in January 2015 by a whistleblower had detailed the role of Shah in NSE’s co-location scam and SEBI had even ordered an investigation into the matter. The data pipeline was also shared with IIT-Madras, IIT-Kharagpur, and IIM-Ahmedabad for free and also, the same can be downloaded by brokers for a nominal fee. So it is a moot point whether IGIDR could replicate what they allegedly did at NSE.

MCX data does not provide the Client ID, the tell-tale information that will clue one into the name of the customer and even the Broker ID is masked, using proprietary technology. The original technology of MCX was developed in Financial Technologies India Ltd. (FTIL – now 63 moons) and is considered one of the best technological platforms for an exchange.

Should the two merge?

For the past six months, SEBI has allowed BSE, NSE, etc. to do trading in Commodity segment too. There is no need for a merger between NSE and MCX because the two technologies are like chalk and cheese – MCX arguably has superior technology inherited from the parent company FTIL. Combining the two could cause significant problems. Additionally, no exchange has been able to take market share away from the other – in other words, BSE, NSE, etc. all exist in their own silos with little change in trading numbers over the past few years. MCX, though it has been struggling lately, seems to be able to keep its hold on the Commodity sector and may even be able to turn the ship around.

Is the ground being prepared at MCX for a merger with NSE?

The MCX board recently discussed the appointment of new independent directors which included the names of V R Narasimhan and S K Mitra. To put it in perspective, while Mitra was nominated even earlier on the MCX board by FMC chairman Ramesh Abhishek, Narasimhan has served almost his entire career in companies linked to just two groups, which is Kotak and NSE and rose through the ranks.

Narasimhan was division chief of secondary markets at SEBI between 1993-96 when NSE was being conceived. In SEBI he was in-charge of broker registration (Before becoming a bank, Kotak started as an equity broker in 1994) and inspection of stock exchanges and also worked on drafting regulations for custodians and depositories.

After the regulations were drafted, in 1996-Narasimhan landed a job at NSE’s 100% subsidiary NSDL and was ensconced there up to 2006. In 2013 when SEBI norms on stock exchanges and clearing corporations were made effective, Narasimhan joined NSE as the exchange’s first chief regulatory officer and worked closely with Ravi Narain and Chitra Ramakrishna, NSE’s former controversial bosses, before retiring from there in April 2018. In between 2006 and 2013, Narasimhan also joined the Kotak group and was the chief compliance officer at Kotak AMC and a director at ACE Derivative and Commodity Exchange, an erstwhile Kotak venture. Sources known to Narasimhan, management of NSE and Kotak told PGurus that Narasimhan’s appointment on MCX board is a vital sign of a precursor to the merger between the two exchanges. Kotak group could be the chief beneficiary of the merger deal as it holds a stake in both NSE as well as MCX and also acted as an investment banker to NSE. Apart from Mitra, S K Mohanty, the now SEBI whole time member, who is looking at commodity segment and MCX has been known to be a close confidant of Ramesh Abhishek and was appointed as the FMC nominee on MCX board in 2015.

Another current independent director on MCX board, Prithvi Haldia, who is in the reckoning to be the next chairman of MCX, is the founder promoter of Prime Database, which has business dealings with NSE as both together run a database website NSEinfobase.com and have marque corporate clients. Haldia is a known figure in financial markets and has even served on some key NSE, SEBI and government committees during the UPA government era. Saurabh Chandra the current MCX chairman retires in the next few months. It is a foregone conclusion that Chandra, known to be an upright man, is not willing to seek another term due to mudslinging within MCX. It remains to be seen which way the wind blows when P S Reddy, the former CDSL boss who will replace Paranjape next month, takes charge. Already, MCX board members have started boasting to Reddy as to how they got his appointment at the bourse cleared in a matter of days and for a term of five years. Rest can be left on top as NSE and MCX shareholders, which also includes large stock market traders and their nominees on the board. The merger deal could be sealed within no time once SEBI clears the deck with its order in co-location scam. Post NSEL crises of 2013, NSE (read PC as he has a major stake in NSE via front entities) will have the cake and eat it too. It goes without saying that in the merger deal bread crumbs will be thrown at the loyal ones, for which the money will mainly come from a sharp up move in MCX share price.

Mr. Modi, please act now!

This is a matter that concerns one of the premier stock exchange of India, the NSE. If NSE wants to go public, it needs to do so on its own legs and not take a backdoor route by merging with an already public company. The crimes committed at NSE are not something that can be punished by mere fines – it goes much much deeper. SEBI cannot just sweep the co-location scam at NSE under the carpet. That NSE did not use a Load Balancer, something that was around for years in its server interface and allowed access to some, is unpardonable. If India wants to be a leader in Finance, it needs to accept its systemic faults and resolve them in a transparent manner. A vested few cannot hold the whole country to ransom.

References:

[1] SEBI’s final order in the NSE co-location scam expected soon – Mar 28, 2019, The Hindu Business Line

[2] MCX probing ‘abuse’ of pact with IGIDR – Nov 26, 2018, The Hindu Business Line

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