Recently, brokers have highlighted concerns over transactions in the National Stock Exchange of India (NSE) that have occurred at unusually low prices, potentially indicating attempts to evade taxes. In August alone, a significant volume of 69.3 lakh shares changed hands at an average price of Rs 3,036.12 per share, making it the second-highest volume recorded in 2023. This follows a previous high volume of around 71 lakh shares in March. The turnover value for August stood at Rs 2,009.87 crore.
Foreign portfolio investors purchased 1.30 lakh shares during this period, while non-resident Indian investors bought around 60,300 shares. On the other hand, domestic investors were net sellers of close to 1.91 lakh shares. The highest recorded price for the month was Rs 3,935, with the lowest at Rs 850. In the preceding month, the high and low were recorded at Rs 3,935 and Rs 1,800, respectively.
Brokers have indicated that unusually low prices in these transactions suggest potential tax evasion strategies. The share price of the NSE in the unlisted market had previously experienced a rally, reaching Rs 3,500-3,600 between 2019 and 2021. However, the average price has since cooled below Rs 3,000 in the past year. Brokers handling NSE shares note that there is often a delay of four to five months, or even longer, between the time a deal is struck and when the shares are eventually transferred after board approval.
The NSE’s strong performance and market dominance make it an attractive investment, garnering significant appetite from investors. For the past three years, the NSE has been the largest exchange globally in terms of the number of F&O contracts traded. It also holds a monopoly on this space in India. Moreover, the NSE’s operating profit margin is nearly 70 percent, and it is the leading derivatives platform worldwide, as reported by the Futures Industry Association. Over the past five years, the number of wealthy investors owning NSE shares has soared, with over 4,300 individuals currently holding shares.
In the June quarter, the NSE reported a consolidated net profit of Rs 1,844 crore, marking a 9 percent increase compared to the previous year. Its consolidated income from operations also rose by 13 percent to Rs 2,987 crore in Q1 FY 24. On the trading volumes front, while cash markets recorded a slight increase in average daily traded volumes (ADTVs), equity futures experienced a decrease of 13 percent year-on-year. Meanwhile, equity options saw a notable rise of 33 percent in ADTVs.
With its dominant market share and impressive financial performance, the NSE’s shares should command a considerably higher value. The rival BSE, which has a smaller market share and slower revenue growth, trades at roughly 53 times trailing earnings. Using a similar valuation metric, NSE shares should be valued at over Rs 5000 per share and potentially surpassing Rs 7000 with a premium for dominant market share.
The NSE’s legal battle also continues, with the Securities Appellate Tribunal (SAT) overturning the Securities and Exchange Board of India’s (Sebi) earnings penalty against the NSE in the colocation case. The SAT imposed a disgorgement penalty of Rs 625 crore on the exchange, and in response, the Supreme Court instructed SEBI to refund Rs 300 crore to the NSE. However, the matter will be back in court for further deliberation in September.
In conclusion, the unusually low prices observed in transactions within the NSE raise concerns of potential tax evasion. Despite this, the exchange’s strong performance, market dominance, and impressive financials continue to attract investors. The NSE’s shares have significant potential for growth, given its leading position in the market and its profitability.
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