National Stock Exchange’s (NSE’s) shares are seeing heavy trading even as there is little clarity on when the bourse will be able to come out with its initial public offering (IPO). While foreign institutional investors have been sellers of late, local high networth individuals (HNIs) are on a buying spree with several new investors now picking up smaller lots. Unlike earlier, when the minimum lot size used to be 10,000 shares, now brokers are willing to engage in lot sizes of as small as 1,000 shares, or even 500 shares in some cases, accommodating investors willing to deploy smaller sums. This has resulted in a significant rise in the number of shareholders in NSE.
This explains heavy trading in NSE shares, despite the absence of a formal platform, over the past year. In FY22, around 5 million NSE shares changed hands on an average every month, which works out to roughly 250,000 shares being transacted every trading day. That’s the kind of delivery-based volumes even many midcap stocks cannot stake claim to.
Trading volume last month were down sharply to 2 million shares, but this has to be seen in the context of the broad-based sell off in the stock market. Price action in the stock, however, indicates that tax-evaders may be exploiting this liquid but unlisted stock.
A hit with HNIs
The number of HNIs owning NSE shares has risen exponentially over the last five years. At the end of FY21, just 7 individuals owned NSE shares. That figure now stands at 1838, with DMart founder Radhakishan Damani, industry captains, and many reputed stock market investors among the shareholders.
The strong appetite for NSE shares is not surprising. NSE is India’s number one stock exchange with a 92.5 market share in the equity segment, a near monopoly in the equity derivatives segment, and the dominant player in the currency derivatives segment. Its operating profit margin is close to 70 percent and it is the number one derivatives platform globally according to data by the Futures Industry Association.
Wide spreads
And yet, for a stock so actively traded, the sharp variation in prices of individual deals is puzzling, even after accounting for the fact that there is no formal mechanism for price discovery.
From the table below it can be seen the difference between the lowest price and the highest price in a month is 100 percent or even more than 200 percent at times.
Since the shares are unlisted, the disparity in prices on any given day will be more than what one would normally see in stocks traded on the stock exchanges. Besides the urgency of the counterparty and size of the block (of shares) are key factors deciding the price at which the deal is struck.
And yet the difference should not be so wide, for two reasons. One, the NSE publishes details of every transaction, and two, HNIs are savvy enough to know what the prevailing market rates for NSE are.
The discrepancy between the lowest and highest prices in a month was not as glaring between June 2020 and March 2021 when HNIs were just beginning to warm to NSE shares. Check table below.
So what explains the gap?
Brokers dealing in NSE shares say the sharp discount to market price is usually when the one of the parties in the deal wants to avoid tax outgo or launder unaccounted cash.
“In unlisted shares the rates are usually in a band of 5-7 percent or at most 10 percent depending on which side is pushing for the deal,” said a broker.
“Anything more than that has nothing to do with fundamentals,” he said.
On paper, the deal will be done at a hefty discount (or premium), and the difference settled in cash later.
“It is hard to evade tax through deals in listed shares, but when the shares are unlisted, the tax man will have a hard time proving the trades were done way below the fair price,” the broker said.
Fair value of NSE shares
For financial year 2021-22, NSE’s consolidated revenues rose 53 percent to Rs 9500 crore and consolidated net profit rose around 44 percent to Rs 5184 crore. Earnings per share is Rs 105. Rival BSE, with a much smaller market share, slower growth in revenues, and less than half the operating profit margin, is quoting at roughly 40 times trailing earnings. Using the same yardstick, NSE shares should be valued north of Rs 4000 apiece, not factoring its dominant market position and better return ratios. The gap between the fair value and what it is going for at the moment can be explained by the uncertainty over when the bourse will eventually go public.
At present, most deals in NSE shares are being done around Rs 2800 apiece, brokers said. They said that the process of NSE approving the transfer of ownership rights takes anywhere between 3-4 months. So most deals reported by the exchange in April would have been done in December 2021 or January 2022.
NSE had filed the draft red herring prospectus for its IPO with SEBI way back in December 2016. However, the DRHP had to be withdrawn after the regulator began investigating a whistleblower complaint that certain trading members were getting preferential access to NSE’s data feed illegally under the colocation facility.
Till January this year, many in the market were hopeful that NSE’s IPO would be approved by SEBI soon. But the wait may have got longer after SEBI’s final order on former NSE CEO Chitra Ramakrishna triggered a fresh probe by CBI into the colocation controversy. Ramakrishna and NSE’s ex-COO Anand Subramanian have been arrested and are presently behind bars.
(With data inputs from Ritesh Presswala)
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