Recent Developments in Indian Capital Market

India’s Multi Commodity Exchange (MCX) is going for IPO starting tomorrow (22^nd February). This development touches on a range of issues pertaining to the Indian capital market and regulations that Celent has been discussing for some time. First, pricing of IPOs has been a cause for concern for many market players and also the capital market regulator, Securities and Exchange Board of India (SEBI). In the past SEBI had expressed its displeasure regarding overpricing of IPOs in a number of cases and asked the underwriting banks to be more prudent regarding IPO pricing. To protect investor interest, SEBI last year proposed that underwriting banks must disclose to investors the performance and track records of their earlier issues in their prospectus and on their websites. Consequently, the merchant banks (Edelweiss, City and Morgan Stanley) involved in the MCX IPO have all publicly disclosed their track record. The past details (IPO size, listing price, comparison to movement in benchmark indices for different periods for individual IPOs) are made available in the IPO document as well as on the websites of the merchant banks. Second, this is the first IPO of the year in India and is eagerly watched, after a lackluster 2011 when companies raised less than 10bn US$ through share sales (compared to 24bn US$ in 2010). This is also interesting as MCX would the first Indian exchange to be listed. This may pave way for the other exchanges, though that is unlikely to happen in the near future. Third is the case of transaction taxes. It is learnt that the finance ministry is considering imposing a commodity transaction tax (of 0.017%) in its budget proposal for 2012-13, initially on non agricultural commodity futures. The government had proposed commodities transaction tax before, in 2009, but this was not implemented because of objections raised from some quarters. India already charges transaction tax on equity derivatives. There is also speculation that this move will be coupled with a cut in securities transaction tax – the motivation behind this being boosting the cash segment and extending the scope of taxation to other asset classes. Familiar arguments have been expressed from both supporters and opponents of this new transaction tax. Supporters argue this will raise revenues for the government and also check speculation in the commodity markets. Many have argued that speculation in commodities had significantly contributed to the rising food prices in the recent past and needs to be curtailed. Also it is argued that cut in STT will attract more investment to the cash market. Opponents argue that this move will increase cost of transaction, reduce volumes at Indian commodity exchanges, result in migration of trades to international exchanges (commodities being global assets), reduce liquidity in Indian markets, impair price discovery and increase volatility. It has also been mentioned that some vested interests may be behind such move; the argument being bigger exchanges strong in cash segment are trying to grow their business at the cost of commodity trading business. This reflects the competitive landscape of Indian exchanges that Celent has discussed in the past.