Indian market reforms put spotlight on remaining weaknesses

India’s Bombay Stock Exchange has launched an institutional trading platform in the small and medium-sized market segment, but more is needed to make the Indian market attractive for institutional traders.

India’s Bombay Stock Exchange (BSE) has launched an institutional trading platform in the small and medium-sized (SME) market segment. It will allow start-up companies and SMEs to list without an IPO as well as providing easier entry and exit options for angel investors, private equity and venture capital funds.

According to the BSE, the SME institutional trading platform offers relaxed compliance and cost effective listing for SMEs. Shri Ashishkumar Chauhan, CEO of BSE said the new platform would “enable SMEs to raise money without having to go through the extensive IPO process”.

Market development and growth has continued this year in India, with recent commencement of trading of interest rate futures and new arrivals to India’s shores, such as NASDAQ OMX’s new office in Bangalore.

However, the relaxation of compliance requirements in capital raising for SME’s throws into sharp relief what the market wants to see in other areas, where regulation potentially prejudices conditions for traders.

There are concerns around block trading in India, which currently has a narrow window to register and trade. In between notifying the counterparty and doing the trade on the exchange, there are potential problems with information leakage, with the regulator, exchange and clearing sides all aware of the trade, meaning front running could take place, especially if a deal is being held overnight.  

“We think this isn’t the way to run an efficient market and we’ve made a number of recommendations to change that and introduce international standards,” said Mark Austen, CEO of the Asia Securities Industry & Financial Markets Association, (ASIFMA).  If off-exchange, you should do the trade then register it on exchange, as other markets operate. There’s no information leakage and counterparties know their trade is done, and you don’t have a problem with frontrunners. India so far doesn’t agree.”

The Indian authorities claim this is detrimental to the retail customer as they should be able to trade at that price as well, and if they cannot do so through the live exchange, then they stand at a disadvantage.

“Our view is that this is a misunderstanding of market dynamics,” says Austen.  “If you buy any product in bulk, you don’t expect to get the same price as for just one item. We’ve been active with India’s regulator trying to explain this, in order to improve market dynamics and so they don’t have a system that encourages local participants to break the law.”