BSE IPO leaves a clutch of investors disappointed; here’s why

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Mumbai | Published: January 18, 2017 6:28:29 AM

BSE’s initial public offering (IPO), while a relief for shareholders looking for an exit, has left a clutch of investors with little to cheer about.

The price band of R805 -R806 is disappointing because the return, over eight years, will be less than one per cent. (Reuters)The price band of R805 -R806 is disappointing because the return, over eight years, will be less than one per cent. (Reuters)

BSE’s initial public offering (IPO), while a relief for shareholders looking for an exit, has left a clutch of investors with little to cheer about. The price band of R805 -R806 is disappointing because the return, over eight years, will be less than one per cent. That’s because, post the bonus issue and after the recent consolidation of shares, the issue price of new shares to a set of strategic partners works out to R800 per share.

At a price of R806, the shares are being valued at 1.6x of the FY16 book value per share of R497.7 (of R2 face value). Going by the price at which State Bank of India (SBI) sold a 5% stake in BSE’s rival National Stock Exchange (NSE) in July, 2016, India’s premier stock exchange was then valued at over 2.8x its FY16 book value.

If NSE is indeed eyeing a valuation of R45,000 crore, as has been reported, its shares will have to be offered at over 7x of its FY16 book value. In other words, NSE is all set to command a valuation that will be about four times higher than that of the BSE.

graph-bse

As experts point out, this would be justified since from 34% a decade back, BSE’s market share in the cash segment has dipped to just 25% in FY16. In the faster growing and more lucrative derivatives segment, BSE’s turnover in FY16 was not even a tenth of that of NSE. “Right now, the market orientation is towards the NSE because that is where the lion’s share of the volume is. NSE will continue to be the exchange of choice,” India Infoline’s Sanjiv Bhasin said.

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Deven Choksey of KR Choksey Securities, however, is of the opinion that BSE’s shares are a bargain since the downside is capped. “BSE’s currency derivatives segment is doing very well as are the new segments it is entering,” Choksey added.

The BSE IPO is entirely an offer for sale (OFS) wherein existing shareholders are offering their shares to the public. Before it was corporatised, BSE was an Association of Person, controlled and managed by trading members, each of whom had a membership card with membership and trading rights. Once it was corporatised and consequently de-mutualised and capitalised, each cardholder was given 10,000 shares in lieu of the membership rights and allowed to retain the trading rights.

Later in FY09, BSE offered bonus shares at a ratio of 1:12. The same year, it issued additional shares to two of its strategic partners — Singapore Exchange and Deutsche Boerse — at R5,200 per share of face value Re 1. Post the bonus issue and after the recent consolidation of shares, the issue price of new shares to its strategic partners works out to R806 per share.

“I had bought a BSE membership card in the late 90s for about R2 crore. A decade later, I had sold about 5,000 shares (pre-bonus) for roughly R2 crore. Now, almost after another decade, I am offering the rest of the shares for again roughly R2 crore,” a BSE member, who runs a small retail brokerage, said.

As if the depreciation in the value of shares was not enough, members have forked out hefty amounts in the form of capital gains tax. “Since the shares were issued only in 2005, many of them had earlier claimed depreciation on their membership rights having treated them as intangible assets. As a result, there are instances of members having paid capital gains tax due to written down costs of acquisition,” a senior tax lawyer explained.

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