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Dual-listed stocks an accidental insurance for Indian markets’ glitches

LiveMint logoLiveMint 17-07-2017 Ameya Karve

Mumbai: Last week’s trading halt at India’s biggest stock exchange highlighted an unusual feature in the country’s equity market — many of its companies are listed on two venues.

Reliance Industries Ltd, Infosys Ltd and HDFC Bank Ltd are among the firms that call both the National Stock Exchange of India Ltd and BSE Ltd home. While businesses often list their shares in more than one jurisdiction, doing so domestically is rare. India’s practice goes back to NSE’s debut in 1994 as a corporate exchange that was thought to bring in better governance to the country’s capital markets, according to Sankarshan Basu, a finance and accounting professor at the Indian Institute of Management, Bangalore.

The legacy has become an unintended benefit in an age when exchanges run on complex software systems that sometimes fail. On July 10, as the NSE was forced to suspend trading for nearly three hours because of a malfunction, investors could still buy and sell shares on BSE’s venue.

“Indian investors are protected by the fact that we are among the very few nations in the world where most of the top companies are dual-listed and the majority of the large brokers have licenses to trade on both the major bourses,” said Dipan Mehta, a member at both BSE and NSE.

When the Indonesia Stock Exchange halted trading because of a glitch on the same day as NSE, there was zero trading in stocks and equity derivatives nationwide. The same was true in Singapore in July 2016, when the local exchange suspended stock trading because of a hard disk failure.

While many countries have one main domestic exchange, India’s authorities are keen for competition between the 142-year-old BSE and NSE, though the newer exchange is dominant, with an 85% share in cash equities trading. As a result of the NSE outage, stock volumes on BSE climbed 77%.

Even in the US where there are 12 public bourses, companies only list at one venue. Having a dozen venues means a halt at a stock’s home exchange doesn’t necessarily suspend trading across the entire market. But single-listing still has vulnerabilities: the opening and closing auctions at the New York Stock Exchange and Nasdaq Stock Market see investors flock to the home bourse, and an outage during those periods could cause major disruptions.

Derivatives difference

While the law in India is that companies can be listed on any exchange with a nationwide network — which currently means the NSE and BSE — most large companies choose to dual list, said Prithvi Haldea, chairman of researcher Prime Database in New Delhi. Many small- and medium-sized companies and a few large ones choose to stick to a single exchange, he said.

The dual listings don’t help in India’s derivatives market, where contracts are specific to a particular exchange and the NSE’s dominance is greater than with cash equities. Derivatives worth a notional value of close to Rs4.5 trillion ($70 billion) are traded daily on the NSE, compared with a total of about Rs27,000 crore of stocks on both exchanges.

“If there is a major issue, all one can do is take fresh futures and options positions on the other exchange,” said Pankaj Karde, president and head of institutional sales at Mumbai-based Systematix Shares & Stocks Ltd.

The NSE suffered its longest-ever halt on 10 July after an unidentified glitch disrupted orders and price feeds, forcing the operator to freeze all equities and derivatives trading. The exchange is already under pressure from an investigation into its practices toward high-speed traders, and is in the midst of a proposed initial public offering that seems to have stalled.

The country’s unusual set up, however, may have saved NSE from further embarrassment.

“Dual listings offer a unique, natural backup and augurs well for risk management in the age of frequent electronic disruptions,” Vaibhav Sanghavi, who manages about Rs900 crore for onshore hedge fund Avendus Capital Ltd., said by phone. Bloomberg

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