Wednesday, January 10, 2007

Foreign flavour: Goldman, NYSE eye NSE pie

MUMBAI: A clutch of five institutional investors, including US-based global investment banking giant Goldman Sachs and the New York Stock Exchange (NYSE), are close to buying a 26% stake in National Stock Exchange (NSE), the country’s biggest bourse.

IL&FS and IFCI are selling 5% each of their holdings in the exchange to Goldman Sachs and NYSE in two separate deals, which are expected to be signed soon. The two shareholders currently hold 7.1% each in the exchange. IDBI and ICICI Bank, the two other institutional promoters, are also expected to offload part of their holdings in the exchange in subsequent deals, according to sources. The valuation of the NSE is expected to be over $2 billion.

Several foreign investors are keen to buy into Indian exchanges. While such transactions are yet to take place in stock exchanges, some of the biggest global players have already taken a toehold in commodity exchanges. The first such deal happened when Fidelity bought around 9% in MCX; later, Goldman acquired over 7% in NCDEX, the other online comex.

The proposed sale of stakes comes close on the heels of guidelines issued by the RBI on foreign investment in Indian stock exchanges. The RBI has allowed foreign investment up to 49% in stock exchanges, fixing foreign direct investment (FDI) cap at 26% and FII limit at 23%. Securities and Exchange Board of India (Sebi) has stipulated investment limit for single foreign investor at 5% beyond which an FII or any other investor like foreign stock exchange will not raise its stake in stock exchanges.

In response to an email query from ET, NSE neither denied nor confirmed the sale of institutional stakes, but said the exchange will send reply only on Wednesday morning.

NSE has 21 promoters: an assorted medley of public sector banks, LIC, ICICI Bank, IL&FS and IDFC. ICICI holds 12.5% and IL&FS has 7.1%. NSE is an extremely profitable entity. In FY06, it had a net profit Rs 206 crore on a revenue of Rs 472 crore. In FY07 it is expected to report a profit of Rs 250 crore: all on the back of a fabulous bull run. It has 70% share of all stock transactions in India.

According to sources, the Bombay Stock Exchange (BSE) had valued itself between $850 million and $1 billion. Using the BSE’s valuation as a benchmark and their proportional market share, a valuation of over $2 billion has been termed ‘as only fair’ by sources close to the deal. However, if one uses the global valuation benchmarks, then NSE has valued itself quite conservatively. NYSE is currently trading at a P/E multiple of 119 and market capitalisation of $16 billion, while Nasdaq is trading at a P/E of 51 and a market capitalisation of $3.5 billion. The London Stock Exchange (LSE) has a market capitalisation of $4 billion.

A global rise in equity prices and interest in equities have made stock exchanges as sought after investments. Add to this a small fact that the stock exchange business is a monopoly — at worst a duoploy — for most exchanges and therefore has very healthy margins. As financial markets all over the world integrate, stock exchanges too have followed the cue.

Early last year, Deutshce Borse, the German exchange, tried to make a bid for the LSE at a $2.5 billion. Soon after Euronext, the holding company, that runs the Paris, Brussels and Amsterdam and Lisbon stock markets tried to bid for the LSE. And this year Nasdaq launched a $4.2-billion bid for the LSE, which again did not bear fruit.


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