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Now in stock: a new exchange you can't trade on

Ashok V Desai | Updated on: 20 June 2015, 18:28 IST

The innovation

  • A digital stock exchange where financial institutions alone trade, not ordinary people.
  • To trade shares of hi-tech companies certified by institutional investors.

The purpose

  • Apparently, to create a bigger market for SME shares.
  • Essentially, for institutional investors to get their money back.

The catch

  • BSE, NSE already have SME \'platforms\'; they don\'t have many takers.
  • Personal investors do little trading in shares now.
  • The new stock exchange will have little turnover.

According to the Bombay Stock Exchange, the finance minister had announced in his budget speech that start-ups and small and medium enterprises could get listed on stock exchanges without an initial public offer.

I found nothing of the sort in his speech, maybe he was having secret thoughts while speaking. In any case, the Securities and Exchange Board of India is about to obey him.

Taking stock

Actually, Sebi had thought for him long ago. In October 2013, it announced two things.

One, an institutional trading platform - a digital stock exchange where only financial institutions will be allowed to trade, not people like you and me.

But why? Has Sebi not made foolproof arrangements to ensure no one can deal on a stock exchange without a prior guarantee that he has the money to honour the deal? It has.

Not for everyone

Well, there are people who are rich or daring enough to take the risk, why not let them in? Sebi has not explained. It would prefer not to because in its view, such rich fellows are by definition undesirable; they cannot have made their money legally.

How do people get really rich in this country? By dealing in real estate, and you know and I know that real estate deals involve black money.

Suppose someone made big money entirely honestly, say, by speculating on the stock exchange? He had better go and give a generous commission to a financial institution to put through his trades.

In Sebi's view, rich fellows are by definition undesirable; they could not have made their money legally

Two, Sebi will select companies that have sold more than half of their equity to private equity funds and venture capitalists and allow their shares to be traded on the new stock exchange.

But they have already got much of their capital from those rich guys, why do they need to sell shares on an exchange? Because the rich institutions want to free their money for other ventures, and because a company whose shares can be traded is a better investment.

Payback for tech investors

Sebi expects entrepreneurs to start new businesses with their own and their uncles' capital. If that is not enough, they can borrow from banks.

Then, if they want to grow even bigger, they can take a certificate of good character from their banker, and go to a 'qualified institutional investor' approved by Sebi, and sell him equity.

Now, some of those qualified institutional investors want their money back, and have asked Sebi to find a way out. Its preferred solution is the proposed new exchange. It will trade in high-technology companies started by geniuses and certified by qualified institutional investors.

That makes me wonder: have the financial institutions been promoting and funding a lot of technology entrepreneurs? If they had, we would have heard of them, their innovations, products, their success in various markets.

One heard a lot about them - chiefly IT companies - in the 1990s and early 2000s, but most of them went to California and made millions. Technological entrepreneurship has been off the radar for a decade at least.

Looking for traders

Now, suppose I am ignorant and there are lots of such geniuses up the sleeves of financial institutions. Suppose Sebi gets the new stock exchange going and the financial institutions try to sell the promising companies' shares. Who will buy them?

No one. Both BSE and NSE have tried to encourage small companies, by means of less demanding listing requirements and by creating 'institutional trading platforms' where shares of unlisted small companies can be traded.

Some of the institutional investors want their money back. Sebi has offered them the new exchange

So what Sebi wants to start already exists as platforms in BSE and NSE. Why then does Sebi want to start another stock exchange?

Although both BSE and NSE have SME (Small and Medium Enterprises) 'platforms', the number of small companies trading on them as well as the turnover on the platforms are quite small.

Sebi probably feels that a new stock exchange will create a bigger market for SME shares. It also seems to have plans to restrict access to the new stock exchange to 'attractive' hi-tech companies.

Set to tank

Sebi will fail. Personal investors do little trading in shares these days. They will do even less in shares of little known small companies, however hi-tech.

There was a time when personal investors all over the country invested in shares. That was because there were agents of stockbrokers at every street corner, and frequent public issues gave investors many chances to make a bet. Sebi destroyed that world.

Today, the Indian market is dominated by institutional investors that put their money mainly in big companies; there are few public issues. Personal investors invest chiefly through mutual funds, which are a variant of institutional investors.

Daring personal investors who might invest in small companies have died out. The new stock exchange will have little turnover, and will be the sickly child of a stupid mother - Sebi.

First published: 18 June 2015, 19:07 IST
Ashok V Desai @CatchNews

A senior economist and commentator on economic policy and a pioneer of economic liberalisation in India, Desai was also Chief Economic Adviser to the government. Known for his iconoclastic, bold and original views on the economy, he has taught, conducted research, and coordinated large research projects both in India and abroad.