India's BSE launches landmark IPO

Asia’s oldest exchange moves ahead with its listing plan, a move seen as crucial as India creates a developed equities market. NSE could be next.

Bombay Stock Exchange launches its initial public offering on Monday, a big step forward in India's plan to list its two major stock exchanges and become a mature equities market.

Officially known as BSE, Bombay Stock Exchange comes to the market ahead of its bigger peer National Stock Exchange of India (NSE), which filed a listing application last month and is slated for a public offering later this year.

India is following bigger markets, including Hong Kong, Singapore, Japan and Australia, in enhancing the transparency of the securities market by listing its major stock exchanges.

Listing stock exchanges also reduces scope for conflicts of interest since many bourses were established by local stockbrokers and market makers.

While most of Asia’s biggest exchanges became public companies between 1998 and 2004, BSE was not able to follow because it was only until 2005 that it completed demutualisation – transforming itself from a mutually-owned entity into a profit-oriented company with multiple shareholders.

In many ways the BSE IPO is a milestone for India’s equities market, which is noted for its plethora of stock exchanges and listed companies. India has 24 stock exchanges in different regions, including two national-level bourses: BSE and NSE.

BSE is the world’s largest exchange in terms of number of listed companies, with 5,963 firms trading their shares on the platform as of the end of June last year. Established in 1875, BSE is also Asia’s oldest exchange.

The listing will also provide a direct gauge of the strength of India’s equities market, since its share price will likely reflect trading volumes and the strength of listing activities.

Terms

Indicative terms of BSE’s IPO comprise 15.4 million shares pitched at an extremely tight range of Rs805 to Rs806 per share. That could raise about Rs12.4 billion ($182 million).

On a fully diluted basis, BSE will command a 28.3% free float immediately after listing its shares on February 3.

BSE’s IPO will see huge number of shareholders cashing out. In fact, all the shares on sale are secondary shares, belonging to 262 shareholders, although that accounts for only a fraction of the exchange’s 9,855 shareholders.

The Singapore Exchange (SGX) is among the biggest sellers, offering about 5.1 million BSE shares, or about one-third of the IPO. Most of the other selling shareholders are local brokers and financial institutions.

By comparison, a number of high-profile shareholders such as Deutsche Boerse, State Bank of India and Life Insurance Corporation of India will not be selling shares. Each of the three will continue to own 4.7% of BSE after the listing.

Approximately half of the IPO will be allocated to qualified institutional buyers (QIB), while non-institutional investors (foreign portfolio investors and non-QIB local investors) will be allocated 15% and retail investors will get 35%.

Edelweiss, Axis Capital, Jefferies and Nomura are joint global coordinators of the IPO.

Preleude for NSE IPO?

BSE’s IPO will be watched closely as it could serve as a reference for the upcoming IPO of NSE, widely seen as India's key stock exchange.

Having two major exchanges has a major impact on India's equity market. Most companies coming to maket in recent years have chosen to list on both exchanges.

For that reason, the combined market value of BSE- and NSE-listed companies is very similar. As of the end of the last financial year, BSE had a market capitalization of Rs94.8 billion and NSE Rs93.1 billion. They are the world’s 12th and 13th largest exchange by market cap respectively.

Yet in recent years BSE has been overshadowed by the newer NSE, where most trades in India are now executed. Last year, NSE’s total cash equities turnover was Rs220 billion, nearly triple BSE’s Rs75 billion.

In the first six months of last year, BSE also saw equitys derivatives trading all-but wiped out, with a 99.9% decline. The exchange highlighted that as a risk factor in its red-herring prospectus, saying there was no guarantee it could compete with NSE in the equity derivatives segment.

However, BSE still maintains its edge as a key license provider in India’s equities market. It generated part of its revenue from licensing its BSE and Sensex trademark and logo to third parties.

India’s bellwether stock index, officially known as the S&P BSE Sensex, is licensed to rating agency Standard & Poor’s. 

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