Is the National Stock Exchange (NSE) a trading house or an infrastructure company? And should it be allowed to sell its shares to foreign brokers, foreigners and Foreign Institutional Investors (FII)? The Bombay High Court is likely to decide on these questions raised in a public interest litigation (PIL) challenging the circular issued by Reserve Bank of India (RBI) terming the national trading house as an infrastructure company and sold 20 per cent of its shares to FIIs.
A circular was issued by the NSE on December 22 last year terming it as a infrastructure company and declared that it could sell upto 49 per cent of its shares to FIIs.
KK Goswami, a businessman, approached the HC in June challenging the RBI circular stating that as per the Securities Contract (Regulation) Act, 1956, stock exchanges across the country are semi-judiciary bodies and stock exchange mean any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. It cannot be and cannot be allowed to be a business/profit-oriented organization, argued petitioner's lawyer Manohar Lal Sharma.
"By permitting to sell shares of the NSE we tend to lose our economic control. If the FIIs have 49 per cent they would dominate the exchanges," argued Sharma.
Sharma alleged that the circular was issued secretly and has neither been published in any official gazette of India nor has been laid in the parliament. It is neither part of any legislation nor supported by any law, states the PIL.
In pursuant of the circular, the NSE has sold out about 49% share of the Exchange in the hand of the foreigner brokers, added Sharma. On 10 thJanuary, 2007 New York Stock Exchange entered India by inking a deal to pick up a 20 per cent stake in the National Stock Exchange along with Goldman Sachs and two other private equity funds for $490 million, states the PIL. Also, IFCI has secretly offloaded 7 per cent of NSE's equity to four institutional investors that included Goldman Sachs, NYSE, General Atlantic & Soft Bank. Prior to the sale, IFCI held 56,00,000 shares constituting 12.44 per cent of NSE's equity. The shares has been sold out to global buyers which include the US-based General Atlantic and Softbank Asian Infrastructure Fund of Hong Kong. The valuation of the NSE is expected to be over $2 billion.
The PIL alleges that a clutch of five institutional investors, including US-based broker & global investment banking giant Goldman Sachs and the New York Stock Exchange (NYSE), are close to buying a 26% stake in National Stock Exchange (NSE), the country's biggest trading houses.
NSE converted their stock exchange as an business organisation. Instead of assisting and regulating the share transactions they converted it as business group for share transactions and in result of it NSE secured net profit of approximately Rs 206 crores on a revenue of 472 crores in financial year of 2006 and it is expected to report a profit of Rs 250 crore in financial year of 2007, added Sharma.
According to the PIL, the Foreign Exchange Management Act, 1999 (42 of 1999) does not authorise RBI to issue the said circular.
Being a semi-judicial body, it cannot be used as a profit making company because the changing nature of the stock exchange will allow these organisation to exploit the investors and to earn profit from their business performance.
The PIL prays that if NSE has recognised itself as an business organisation company, then its recognition to work as a Stock Exchange must be terminated with immediate effect .
While asking to set aside the circular issued by the RBI, the PIL also seeks direction declaring the sale transactions and transfer of the equity shares of the Stock Exchange, NSE and other, under the garb of the impugned notification, as illegal.
The HC is likely to pronounce the judgment next week.
In November 1992 leading Financial Institutions incorporated the National Stock Exchange, (NSE), located in Bombay. NSE has 21 promoters; an assorted medley of public sector banks, LIC, ICICI Bank, IL&FS and IDFC. ICICI holds 12.5% and IL&FS has 7.1%.
It opened for trading in mid-1994.