Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Foreign Investment in Indian Exchanges

I wrote a piece
in the Economic Times on Monday about
permitting foreign investment in Indian exchanges. I wrote:

The ownership of exchanges should be largely left to
market forces with minimal regulatory intervention. The regulatory
goal should be to ensure that the securities trading industry is
highly competitive. The death of the trading floor and the rise of
electronic trading platforms have completely changed the nature of

From being cosy clubs, they have become complex businesses that are
technology driven. In the process, they have also become highly
capital intensive. The ability to respond to the demands of a highly
sophisticated and global user base has become paramount. SEs and
derivative exchanges now require investors with deep pockets and
willing to make the strategic investments required to grow the

Any attempt to exclude such investors tends to favour incumbent
exchanges and perpetuate existing monopolies and duopolies. From the
social point of view, this would lead to a less competitive and
therefore less vibrant, less innovative and less investor-friendly
capital market.

We must welcome foreign investment in our SEs and commodity derivative
exchanges as well as the exchange-like entities that trade currency
and fixed income products. SEs and derivative exchanges enjoy very
attractive valuations in global markets today and we must allow our
exchanges to tap these global markets to raise capital. Foreign
exchanges and other strategic investors could also help revive and
strengthen the less well performing exchanges and thereby foster
greater competition.

India’s position on foreign ownership should be the same as that of
the Financial Services Authority of the UK which has stated: “We
will be indifferent to the nationality of the owners or the managers
of the London Stock Exchange, and will be concerned to ensure that the
future operation meets our regulatory standards.”

We too should focus on strengthening our regulatory framework so
that ownership of the exchanges becomes irrelevant. We must not allow
the incumbent exchanges to wrap themselves in the flag and appeal to
our xenophobia to block much-needed competition.


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