Most brokerages and analysts recommend subscribing to the issue, given its low pricing, stable earnings from corporate services and upside to exchange business in the country, but retail investors will do well to consider the following risks to their investments before buying into the issue
BSE Ltd’s IPO, which opened today, has gathered lot of buzz around it with the anchor investors already buying into the issue at an aggregate Rs 373 crore. Meanwhile, as per media reports, the shares in the grey market are selling at a premium of Rs 110-115 to the issue price of Rs 805-806, showing a healthy enthusiasm for the issue.
BSE Ltd, owner of the Bombay Stock Exchange, is looking to raise Rs 1,243 crore at the top end of the price range for its promoters and existing shareholders.
Asia’s oldest stock exchange owners’ IPO, set for January 23-25, will see some of BSE’s shareholders selling a total of 1.54 crore shares, and will value the stock exchange at Rs 4,400 crore at the top end of the price range.
With 5,868 companies listed on the main board, it is the largest exchange by number of listed companies. Currently BSE has a 14% market share in the Equity cash segment. It is India’s largest and the world’s 10th largest exchange by market capitalisation, with $1.7 trillion in total market capitalisation of listed companies.
Most brokerages and analysts recommend subscribing to the issue, given its low pricing, stable earnings from corporate services, potential upside to exchange business in country, and other such factors. However, retail investors will do well to consider the following risks to their investments before buying into the issue.
- The complete exit of some of the prominent shareholders, including some of the founding shareholders, may be seen as a negative as investors may suspect a limited upside to the company’s business. Some of the top BSE shareholders, who will sell their holdings in the offering, include Singapore Exchange Ltd, Quantum (M), Atticus Mauritius and Acacia Banyan Partners. Singapore Exchange Ltd (SGX), which has 4.7% stake in BSE, will sell its entire 4.7% stake to make a complete exit. Another major investor selling its stake includes a Citigroup unit. However, Deutsche Boerse and several domestic investors including SBI and LIC will continue to remain invested with their holdings.Further, BSE Ltd will not receive any funds raised from the issue. The proceeds from the share issue will go to the shareholders selling their holdings in proportion of the shares being tendered by them. Thus the money invested by the buyers of the issue will not be used by the company to further strengthen its business operations.
- Substantial part of its revenue is dependent on trading in equities, which is outside of its control. Equities trade is highly volatile, and depends on share prices of the listed companies and general market sentiments, leaving BSE’s revenue and profitability vulnerable to fluctuations. “Transaction charges and depository fees together account for 31% of revenues and are linked to overall market conditions and can be lumpy,” Angel Broking said in a note. Further, several expenses including those on personnel and assets, remain fixed in the short term.
- BSE trails the rival NSE by a huge margin in equity cash and equity derivatives segment. BSE has only 14% market share equity cash trading. NSE, launched much later, commands over 80% of the market. Further, BSE’s equity derivatives segment turnover plummeted to a miniscule after it discontinued liquidity enhancement incentives in April 2016. Equity derivative contracts traded per day fell from the height of 20.80 lakh in financial year 2014-15 to a mere 1,446 in the six months ended September 30, 2016. While other security trading have some potential, it remains to be seen how much of that will convert into revenue for BSE.
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- The valuation of BSE’s holding in the depository CDSL may come under pressure, given the limited timeframe available for it to dilute its equity stake. BSE holds 50.05% share capital in CDSL, which it must reduce to a maximum of 24% by March 31, 2017, as per regulatory requirements. This may reduce BSE’s bargaining power and may hurt CDSL’s valuation, sharply depleting BSE’s expected return on investment. Further, the usual concerns remain about being able to finding a willing buyer, or being able to complete the process of the sale by the required deadline.
- Exchanges face huge regulatory risk, as this business is highly regulated and is under constant scrutiny. Small investors must brace for potential price volatility from various regulatory compliance requirements from time-to-time, and must be willing to stay invested for longer horizons for such volatilities to stable out.