NSE IPO Review: Can It Create Wealth for Investors Like BSE?

NSE IPO: The Big Question for Investors

The long-awaited National Stock Exchange IPO is finally moving closer to the Indian primary market. NSE has filed its Draft Red Herring Prospectus with SEBI, nearly a decade after its first attempt to go public was delayed by regulatory proceedings.

During this period, India’s equity market expanded dramatically. New demat accounts, growing retail participation, higher derivatives volumes and increased institutional activity strengthened NSE’s business and created substantial value for its existing shareholders.

The important question now is: Can investors entering through the NSE IPO earn returns similar to those delivered by BSE after its listing?

The answer depends mainly on NSE’s final IPO valuation, future trading-volume growth and regulatory environment. NSE is an exceptionally strong business, but incoming investors may be entering after the most explosive phase of market expansion.

NSE IPO Key Details

The final issue size and valuation will be confirmed only after NSE announces the price band and files its Red Herring Prospectus.

Why Did the NSE IPO Take So Long?

NSE initially filed for an IPO nearly ten years ago. However, regulatory investigations and related proceedings delayed the listing process.

During the intervening period, the Indian stock market underwent one of its most powerful expansion phases. NSE benefited substantially from:

• Rapid growth in demat and trading accounts
• Increased retail investor participation
• Expansion of online and mobile trading
• Rising equity derivatives volumes
• Greater mutual fund and institutional activity
• Increased financialisation of household savings

Consequently, NSE’s earnings and private-market valuation increased considerably before public investors received an opportunity to participate.

How Does NSE Make Money?

A stock exchange earns revenue whenever investors and traders execute transactions through its platform. Transaction charges are therefore one of NSE’s biggest sources of income.

The exchange also earns from:

• Listing fees
• Data and information services
• Index licensing
• Connectivity and co-location services
• Clearing and settlement services
• Technology-related services
• Treasury and investment income

Higher trading volumes generally produce higher transaction revenue. This gives the exchange business operating leverage because its infrastructure can handle additional transactions without a proportionate increase in costs.

NSE’s Powerful Network Effect

Stock exchanges benefit from a strong network effect. Traders prefer the exchange offering the highest liquidity, narrowest bid-ask spreads and greatest number of participants. Their presence, in turn, attracts more investors, brokers and institutions.

This cycle has helped NSE establish a dominant position in India.

NSE’s large market share creates a significant competitive advantage. However, BSE has been gaining ground in selected derivatives contracts, making competitive developments important for prospective NSE shareholders.

Why Did BSE Shares Deliver Exceptional Returns?

BSE was listed in January 2017. Since then, its shares have reportedly delivered returns of approximately 35 times, making it one of the biggest wealth creators among listed financial-market infrastructure companies.

BSE benefited from being publicly available before the extraordinary post-pandemic expansion of India’s capital markets. The Covid-19 period triggered a sharp increase in retail participation as individuals opened trading accounts and entered equities and derivatives.

The resulting rise in transaction volumes substantially increased the growth potential and valuation of exchange businesses.

However, BSE’s historical performance should not be considered an assured indicator of NSE’s future returns.

Can the NSE IPO Replicate BSE’s Performance?

Replicating BSE’s approximately 35-times return may be difficult because NSE is likely to enter the public market at a much higher valuation and after India’s exceptional trading-volume expansion has started moderating.

BSE was listed when:

• Its valuation was comparatively modest.
• Retail market participation was much lower.
• Derivatives volumes had not yet exploded.
• India’s demat-account base had significant room for expansion.
• The market had not fully recognised the value of exchange businesses.

NSE’s existing shareholders have already captured a large part of this value creation through the unlisted market. IPO investors may therefore be buying a mature market leader rather than an under-recognised emerging opportunity.

Why the Offer-for-Sale Structure Matters

The entire NSE IPO is expected to be an Offer for Sale. This means existing shareholders will sell their shares and receive the proceeds.

NSE itself will not receive fresh capital from the IPO.

An OFS is not automatically negative because NSE may not require substantial capital for expansion. Nevertheless, investors should understand that the issue is primarily providing liquidity and an exit opportunity to existing shareholders.

Global Stock Exchanges: Steady Compounders

Major listed stock exchanges globally have generally delivered stable long-term returns rather than spectacular multibagger gains. Their ten-year shareholder returns have reportedly ranged between approximately 7% and 16% CAGR.

BSE, with an estimated nine-year CAGR of about 47%, is an exceptional outlier. Its performance reflects the unusual expansion of India’s equity and derivatives markets and its low starting valuation.

NSE may therefore be better evaluated as a high-quality, steady compounding business rather than as another guaranteed BSE-style multibagger.

Key Strengths

• Dominant position in Indian capital markets
• Powerful network effect and high entry barriers
• Asset-light and scalable business model
• Strong transaction and data revenue
• Structural growth in household financial savings
• High brand recognition and institutional trust

Key Risks

• Potentially expensive IPO valuation
• Heavy dependence on derivatives volumes
• Regulatory restrictions on index options
• Growing competition from BSE
• Complete OFS with no fresh funds for NSE
• Technology, cybersecurity and operational risks
• Slower growth after the post-pandemic trading boom

Chanakya View

NSE is undoubtedly one of India’s highest-quality financial-infrastructure businesses, but IPO returns will depend on the price paid.

Investors should not apply merely because BSE delivered exceptional historical returns. BSE entered the public market before the strongest phase of Indian capital-market expansion, whereas NSE investors may enter after much of this growth has already been reflected in its valuation.

The NSE IPO can still become a strong long-term investment if it is offered at a reasonable valuation. However, if the pricing discounts several years of future growth, listing gains and long-term returns could remain moderate. The final recommendation should therefore be made only after examining the price band, earnings multiple and valuation comparison with BSE and global exchanges.