How the recent scandal, IPO delay are hurting NSE’s valuation

The National Stock Exchange (NSE) of India Ltd has recorded a rapid rise in its trading turnover over the past few years as it cemented its dominance as India’s biggest equity bourse and the world's largest derivatives marketplace. That has reflected in a similar rise in interest among investors looking to buy NSE’s shares as also its valuation.

However, a regulatory investigation after serious corporate governance lapses came to light earlier this year has put potential investors on the back foot and has likely delayed its much-anticipated initial public offering (IPO). This, in turn, has led a sharp drop in its valuation, as is evident from off-market deals in its shares.

Discussions with market dealers indicate that the NSE’s shares are now quoting around Rs 3,000 apiece in off-market deals. This is a 17-20% discount from Rs 3,650-3,750 apiece in late 2021, but still triple the price at which trades took place in March 2020.

The recent transactions mean that NSE — backed by a bunch of private equity and venture capital investors such as US-based TA Associates and Tiger Global as well as Singapore state investment firm Temasek — is now valued at roughly Rs 1.48 trillion ($19.3 billion) after touching a peak of Rs 1.85 trillion ($25 billion) last year.

The valuation fell after a scandal involving its former CEO, Chitra Ramakrishna, who is alleged to have shared confidential data with an unidentified spiritual mentor purportedly based in the Himalayas. This has led to intense scrutiny by investigators including the Securities and Exchange Board of India, but more on this a little later.

Rapid growth

NSE data shows the exchange plays a dominant role in India's derivatives market. The equity derivatives segment alone contributes 87% of its total volumes at 16.88 billion contracts traded between April 2021 and early March 2022. The value of such contracts traded on the bourse so far this fiscal year is Rs 154 trillion, a whopping 98% of its overall turnover, as per the data.

When compared with the previous year, trade volume has grown 127% and turnover value has risen 139%. Barring 2016-17, when the exchange saw a 33% drop in trading volume, its might has only increased year-after-year with stupendous growth in volumes and turnover.

This growth in NSE’s business is reflective of the growth in market participation. The number of demat — short for dematerialised — accounts crossed 84 million from just 36 million in March 2019 and 77 million in November 2021 as pandemic-driven lockdowns and work from home encouraged more people to dabble in the stock markets for additional disposable income.

Sure, this rise in NSE’s share price and valuation is reflective of its business growth in recent years coupled with the stability brought in by managing director and chief executive officer Vikram Limaye, who was appointed to the job in the aftermath of the co-location scandal involving the erstwhile top brass.

The NSE waded through a difficult period after then MD and CEO Chitra Ramkrishna resigned in December 2016 citing “personal reasons” just when the exchange filed its draft prospectus to go public and list its shares on the rival exchange, BSE. However, the recent turn of events has put the new investors on the back foot if the drop in its valuation is anything to go by.

New investors, delayed IPO plan

Last quarter, multi-stage venture capital firm Elevation Capital (formerly SAIF Partners) trimmed its holding in the NSE. Many other investors such as Goldman Sachs, Norwest Venture Partners, and IFCI have already cashed out and exited via secondary deals.

Others like Life Insurance Corporation (LIC) of India, Citigroup Strategic Holdings, IDBI Bank and State Bank of India are looking to sell either partial or entire stake, as they had proposed in the IPO five years ago.

In fact, many of the bourse's recent investors such as Crown Capital and Canada Pension Plan Investment Board (CPPIB) hopped on the bandwagon anticipating an IPO in the near term and stellar listing gains in a frothy market flushed with liquidity.

A look at NSE's December shareholding showed it had 1,941 shareholders compared with 1,681 at the end of September 2021, 1,290 in June 2021, and 1,024 in March 2021. In June 2020, it had just 425 shareholders.

However, the capital markets regulator SEBI, with a new chairperson in Madhabi Puri Buch, is in no hurry to give its nod to the NSE’s IPO plan. In fact, media reports indicate that the IPO might be delayed by one more year even as the NSE desperately seeks regulatory approval due to the mounting pressure from its shareholders. 

With the matters now under the purview of the Income Tax department and the Central Bureau of Investigation (CBI), it may take more than one year to resolve and clean the mess — at least if one were to assume basis the years taken by SEBI to release an order from its own investigation.

In addition, NSE needs a new chief as Limaye will leave the exchange in July after declining to run for a second term. “I have informed the board that I am not interested in pursuing a second term and will therefore not be applying and participating in the process that is underway,” Limaye said in a statement.

If such is the case, many new investors including high-net-worth individuals (HNIs) such as Radhakishan Damani (promoter of D-Mart), Manish Chokhani (Enam Capital), and the Kotharis (Riddhi Siddhi Bullion) may start looking for an exit route in a falling market, which may impact NSE's business growth and dampen its share price, and therefore the valuation.

The BSE's benchmark Sensex and the NSE's benchmark Nifty have both fallen over 10% since their respective all-time highs in October 2021. The decline, coupled with high volatility, has been exacerbated by geopolitical tensions (Russia-Ukraine conflict), high inflation, and frothy valuations that have shifted foreign investors' focus to more attractive markets such as China and Australia.

Many foreign brokerages trimmed their forecast for the Nifty last month. To compound that, Swiss investment banking firm Credit Suisse downgraded Indian stocks to 'Underweight' from 'Overweight' as part of a tactical shift in its portfolio.

“China’s energy import bill is moderate. The closed capital account insulates it from Fed rate hikes and high-frequency indicators point to macro stabilization… China has historically acted as a safe haven in risk-off trades,” said Dan Fineman, who serves as co-head of Equity Strategy at Credit Suisse Asia Pacific Securities Research division.

Credit Suisse had upgraded China to 'Overweight' in January from 'Market Weight' rating.

“Oil hurts (India’s) current account and adds indefinite pressure besides increasing sensitivity to United States Federal Reserve rate hikes,” said Fineman in a note to clients, adding that India remained most vulnerable to higher oil prices, along with the Philippines.

NSE versus the rivals

The NSE’s smaller rival BSE Ltd (formerly Bombay Stock Exchange), which listed five years ago, commands a market capitalisation of Rs 9,559 crore ($1.25 billion). The Multi Commodity Exchange (MCX) of India, the only other listed exchange, commands a valuation of Rs 6,372 crore ($830 million), as per stock exchange data.

There are nearly three dozen listed bourses across the world. BSE ranks 17th while MCX ranks 20th, as per the FTSE-Mondo Visione Exchanges Index, a joint venture between FTSE Group and Mondo Visione.

The recent transactions would place the NSE on the seventh rank — behind the CME Group ($87.54 billion valuation) at the top, Intercontinental Exchange ($76.37 billion) at second, and the London Stock Exchange ($48.5 billion) at fourth ranks.

However, any adverse findings and regulatory actions will further deteriorate the NSE’s valuation, though it may still feature among the top 10 bourses in the world given its dominance in the Indian market.

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