Delay In Co-Location Settlement Pushes NSE Investors To Look At Exit Options

IPO delay is forcing NSE investors to cash in on rising private market valuations.

Silhouetted employees pass though security as they enter the National Stock Exchange (NSE) in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
Silhouetted employees pass though security as they enter the National Stock Exchange (NSE) in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Over the last six months several investors in the National Stock Exchange have sold all or some of their shares given the rise in the exchange’s share price and uncertainty over its initial public offering, said two people familiar with the transactions.

Currently, shares of India’s largest exchange are quoting at Rs 900-950 in the private market, valuing the company at about Rs 50,000 crore, the people told BloombergQuint requesting anonymity. That’s higher than the valuation NSE expected in its IPO slated for early 2017, as per estimates by bankers then. Except that the offer has been delayed for over a year now on account of the ongoing probe into alleged illegal access granted to certain brokers via its co-location services.

Last week, SEBI returned the NSE’s plea seeking to settle the co-location probe. The exchange had filed the consent petition on behalf of 13 current and former officials, including itself. The Securities and Exchange Board of India has asked the applicants to file a fresh consent plea once it completes the probe against brokers allegedly involved in the case.

This uncertainty over the probe, that started in 2015, and lack of clarity regarding the IPO timeline has prompted some of NSE’s domestic and foreign investors to exit their investments, said one of the persons quoted above. In the last six months, domestic investors IFCI Ltd., IDBI Bank Ltd., Bajaj Holdings & Investment Ltd. have pared their stakes in the NSE, as per information filed with stock exchanges. Bank of Baroda has also stated in disclosures to investors that it is in the process of selling its NSE shareholding.

Foreign investment firm NVP sold close to half its shareholding, according to the second person quoted. It is awaiting the closure of board formalities as any sale of the exchange’s shares requires its board’s approval to ensure the incoming shareholder meets the regulatory requirement of ‘fit and proper’. NVP did not comment on the matter.

A few other foreign investors have signed term sheets for part sale of their stakes, said the first person cited above.

IFCI sold a portion of its shareholding in January at Rs 925.10 per share, valuing the exchange at close to Rs 46,000 crore. Soon after, NVP is said to have sold at a valuation closer to Rs 50,000 crore.

The NSE had 79 shareholders when it filed its IPO draft red herring prospectus in December 2016. That increased to 84 as of December 2017, according to exchange filings, and is expected to top 100 by the end of March, said the second person. Many of the new investors are high-net-worth investors and pre-IPO funds, he added. Incidentally, IIFL Special Opportunities Fund acquired 0.80 percent in a series of transactions over the last year.

New investors are buying in the hope that the NSE IPO, when it happens, will fetch them a price that is at least 30 percent higher than current valuations, said the second person. He said many of these investors are comfortable with holding their shares for 12-18 months to make that return.

In December 2016, the NSE filed the draft red herring prospectus with SEBI for an IPO of 11.14 crore shares constituting 22.5 percent of the post-offer paid-up equity. The IPO size was estimated at Rs 10,000 crore, valuing the exchange at close to Rs 45,000 crore.

The entire IPO was an offer for sale of shares owned by 27 investors, both domestic and foreign. Bankers to the issue included Citigroup, Morgan Stanley, JM Financial Institutional Securities and Kotak Mahindra Capital Company, HDFC Bank, ICICI Securities, IDFC Bank Ltd. and IIFL Holding Ltd.

In a public statement issued today, the NSE said it hoped to complete the IPO in financial year 2018-19. The exchange has yet to respond to BloombergQuint’s specific queries on ongoing stake sales.