sanjay NishankBy Sanjay Kumar Nishank in Pune, August 29, 2016 : When we think about stock exchanges all over the world, we have an inherent perception that they are public utilities and they can dabble only in publicly listed companies. But, this perception ignores some of the business realities that they have been dragged into.

On the one hand, there are several new types and evolved venues/facilities, where trading can take place, like the multilateral trading facilities (Chi-X, UBS MTF etc) and they are giving tough competition to the exchanges. On the other hand, the value/volume of equity trading on the exchanges has come down. This has happened because of several reasons, including:

1. Deterioration of the investors’ trust in the exchanges price discovery mechanisms, with some of the investors speculating the mechanisms to be rigged.
2. The willingness of most of the high growth and unlisted private companies to stay private for a longer period of time, rather than wanting to subject themselves to the rigors of public listing.
3. The all-pervasive use of Algo-trading and machine-operated trading leaves little to no choice for the genuine investors to have any play with the equity trading

Because of all the above factors, at an overall level, the trading revenues (which forms the largest component of an exchange’s revenue source) for an exchange has come down drastically in the last 5 years and has left them looking for newer and innovative ways of augmenting the transaction revenues.

One of the significant ways that, some of the larger exchanges like stock exchangeNYSE Euronext and Nasdaq OMX have tried to address the augmentation of transaction revenues, if not in the short term, but at least in the long term, is by setting up or supporting some platforms for the transactions/trading in stocks of private companies. Nasdaq OMX has tried doing this twice in the past, with The Portal Alliance and BX Ventures and is recently trying to do it again with Sharespost, by forming a JV company, Nasdaq Private Market (NPM). NYSE already has something on similar lines, NYSE MKT, which caters to the small cap high growth companies.

Both of these exchanges have received enough attention because of the listing of “ex-private” companies like Facebook (in Nasdaq OMX) and Twitter (in NYSE). In fact, Facebook and Twitter stocks were listed in secondary market platforms like sharespost and second market and their actual price discovery happened in those platforms, before they were listed in the main boards.

To add to it, there was huge amount of investor interests in the stocks in these platforms and in a way, because of these marquee stocks, the secondary trading platforms become hugely popular. One would assume, looking at the success of these stocks in the private platforms, the larger exchanges like NYSE and Nasdaq would have got enough ideas and that’s why Nasdaq would have decided to get directly into it rather than playing second fiddle to platforms like Sharespost. The other reason for the urgency of entering into the area of private companies can also be attributed to passage of JOBS act in the US and the relaxation of the shareholder numbers in private companies and general solicitation rules.

In India, none of the exchanges have yet taken a bet in enabling the primary/secondary market for private stocks. Post the Indian Government’s announcement, they have tried to cater to the reasonably established companies by setting up platforms like the SME exchange and Institutional trading platform (ITP). Both of these platforms have not lived upto their billing, primarily because of two reasons:

1. To cater to the needs of the private companies and their fund-raising/transaction requirements, needs dedicated effort, team and understanding (in terms of market engagement, information dissemination etc), rather than just setting up something and waiting for these companies to run in droves to the platform. These private companies are a completely different beast as compared to the typically publicly listed companies or the Pre-IPO companies and their growth funding requirements are different as well.

2. Some of the structures for bringing the companies to these platforms (i.e. pre-funding and post funding stages) are not yet in place. These companies can’t be expected to do all the due diligence themselves, bring their own set of investors and then just come to the platform and consummate the transactions on the platform. Why would they do so? They have so many other options of doing the same outside these platforms.

If we want to enable some platforms for trading in private company stocks, we really need to think in detail on all the activities that need to be executed by the platform or the related participants, so that the private companies can be left quietly to focus on developing their products/services and develop their markets.

At the same time, these platforms for private companies should take on the responsibility of enabling various means of exciting the investors and general market about investing in private company shares.

Even though, at the current time, the Indian exchanges are regulation-bound to do more in the area of private company share transactions, over a period of time, their willingness and appetite for enabling and supporting such platforms either by themselves or in collaboration with other private players will increase. And that’s when we can truly say that we have removed the long standing bottlenecks in providing growth capital to the privately held high growth companies.

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