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India's National Stock Exchange Plans Short Sales in Weeks to Boost Trades

Date: Thursday, May 27, 2010
Author: Bloomberg

National Stock Exchange of India Ltd., the nation’s largest bourse, plans to offer short sales within the next few weeks aimed at luring investors to the local market after expanding in the U.S. and Singapore.

The company, which counts Goldman Sachs Group Inc. and Temasek Holdings Pte as shareholders, will introduce short selling to meet a “huge demand,” Chief Executive Officer Ravi Narain said in an interview at his office in Mumbai.

National Stock Exchange is expanding in India as foreigners pumped in a net $4.3 billion this year, 18 percent more than a year earlier, data compiled by Bloomberg show. The nation’s benchmark stock index dropped less than half the MSCI Emerging Markets Index’s 16 percent slide from its April 15 peak.

“My view is that if the whole world is rushing to India, you’d have to be brain dead to be rushing out,” Narain, 54, said yesterday. “Our strategy should be to continue to attract foreign investors to Indian assets onshore and to bringing foreign products to Indian markets.”

Temasek, Singapore’s state-owned investment company, called its 5 percent investment in the National Stock Exchange “a proxy to India’s growth and the development of its capital markets” when it bought out NYSE Euronext’s stake this month. The economy may grow 8 percent in the 12 months through March 31, the central bank predicted April 27. That would follow last year’s 7.2 percent expansion.

China, Germany

National Stock Exchange’s average daily turnover in equities has more than doubled in the past four years, according to data on its website. Narain, who was involved in setting up the Indian bourse since its incorporation in 1992, now wants to broaden the products with the short sales allowing traders to borrow the assets they deal in.

The bourse’s plan comes as China introduced short sales and margin trading two months ago, and this week said it will allow some foreign funds to trade index futures. Germany earlier this month banned uncovered short selling of some bonds and naked short selling on the shares of 10 German financial companies, saying such practices endanger the stability of the economy.

National Stock Exchange is also speeding up the time transactions take to enter and leave its system, and Narain forecast executions will be cut to less than one millisecond by the end of the year from five milliseconds.

Among products due to be available by yearend are an intraday volatility index and other options, said Narain, a Cambridge University-trained economist with a MBA from the Wharton School of University of Pennsylvania.

S&P 500

National Stock Exchange, which began trading equities in November 1994, plans to sell its index futures in the U.S. under an agreement with CME Group Inc., owner of the world’s biggest futures exchange. That will allow Standard & Poor’s 500 Index and Dow Jones Industrial Average futures to trade in rupees on the Indian bourse.

For foreigners, access to India’s capital markets remains restricted by bureaucracy, said Vikas Pershad, Chicago-based chief executive officer of hedge fund Veda Investments LLC. The country last month ordered overseas funds to provide ownership information for money coming into the equity market as the regulator tightens so-called know-your-client norms.

“It takes a long time for foreign investors to register,” he said. “If India’s capital markets have to compete with U.S., Australia, Hong Kong, Japan or Western Europe then the process should be made simpler, faster and less costly.” Pershad declined to say how much he has invested in India.

National Stock Exchange said it’s careful with the introduction of short sales and isn’t rushing to roll it out.

“Very soon, we’ll have finished building our systems and we’ll launch this, and then people will be able to short,” Narain said. “There’s been a huge demand for lending and borrowing of shares.”