The Indian stock market regulator (SEBI) has recently eased the ownership norm of companies that are looking to start a stock exchange in India. This means SEBI is looking for a new entrant in this space which will give strong competition to the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
NSE and BSE
Before we get into the details of the news, let us know a bit about NSE and BSE. If you have ever purchased a stock, you would have seen two buying options, one on NSE and the other one on BSE. You can think of them as platforms that help you trade in many financial segments like currency, debt instruments, stocks, mutual funds and derivatives. When a company decides to go public it can register itself on NSE, BSE or both.
The need for a new entry
Bombay Stock Exchange is Asia's oldest exchange. When technology advancement happened in the early 90s, it had to work hard to merge its legacy platform with new technology. NSE on the other hand was started in 1992, and it was created with a strong technology foundation. Today, most of the transactions are happening on NSE. The volume of transactions is increasing every year and since most of the transactions are happening only on these 2 platforms, SEBI would like to have another player to change the market dynamics.
NSE in the recent past has had several technical glitches which resulted in heavy loss for the investors. A new competition will ensure, existing players tighten things up at their end. The new competition will also lower the cost of trading for the traders and investors which may lead to more people coming into the equity market.
The condition for a new entrant
If a company is looking to set up a new exchange, below are the parameters set by the SEBI
For both types of entrants, other than promoters no single person can hold a maximum of 25% in the company. Another important restriction proposed by SEBI is on the experience level of the entrant. 50% of the stake should be with entities that have an experience of at least 5 years in technology related to financial services or in the capital market. In case of acquisition of more than 25%, the concerned parties will have to take prior SEBI approvals.
SEBI is looking to make use of new technologies in the trading space in India. In its latest statement related to the addition of new bourses, it said, 'Several new fintech players have emerged in trading space in various jurisdictions, who are increasingly deploying these disruptive technologies and challenging the traditional functioning of stock exchanges and depositories (collectively termed as market infrastructure institutions, or MIIs).'
By introducing new technologies, SEBI wants to create a competitive landscape in MIIs which will ensure the new MIIs challenge existing players, merge with them, or acquire the existing players.
This is just an initial proposal by SEBI and they have asked for feedback on their proposal. More updates on this will be available in the first week of February.
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