In today's Finshots, we explore the regulatory hurdles the NSE faces as it prepares for a highly anticipated IPO.

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The Story

After a decade of delays driven by regulatory scrutiny and the co-location controversy, the National Stock Exchange (NSE) is finally moving toward its IPO. SEBI formally issued a No-Objection Certificate in 2026, removing the primary regulatory obstacle. However, the exchange still faces quite an unusual structural problem.

The NSE cannot legally list its own corporate shares on its own trading platform. This is because Regulation 45(2) of the Stock Exchange and Clearing Corporation Regulations says

“A recognised stock exchange shall not list any securities of its associates.”

And the logic behind this restriction is straightforward, don’t you think?

The exchange operates as an institution with significant responsibilities in daily trading, market surveillance, corporate listing standards, and overall market integrity.

So, allowing the exchange to list itself would effectively make the institution the primary regulator of its own publicly traded stock. 

Therefore, the exchange must formally list its shares on its rival, the BSE.

But here's where things get interesting. Being listed on the BSE does not necessarily mean that NSE shares have to trade only on the BSE. The NSE is considering using an existing mechanism called the ‘Permitted to Trade’ category.

Under this framework, a security can be formally listed on one recognised exchange and then admitted for trading on another exchange without being separately listed there.

NSE's shares would be formally listed on BSE, which would remain the primary listing venue responsible for the relevant listing and disclosure requirements. At the same time, NSE could admit those very shares for trading on its own platform.

Think of it like this: imagine a company called ABC is officially listed on BSE. That means BSE is the exchange responsible for making sure ABC follows its listing rules and disclosures. But if ABC is also admitted under the Permitted to Trade category on NSE, an investor could open their trading app, select NSE as the exchange, and buy or sell ABC shares there too. The stock is listed on BSE, but it is traded on both BSE and NSE.

NSE wants to use the same arrangement for its own shares. So its stock would be formally listed on BSE, but investors could potentially trade it on both exchanges, including NSE itself.

The Permitted to Trade framework already exists and is used by hundreds of securities listed elsewhere that also trade on NSE. Companies such as Goodyear India and Novartis India are examples of securities that have traded through this framework.

In fact, when BSE went public in 2017, it formally listed its shares on NSE. So once NSE goes public, India's two biggest exchanges would end up in an almost perfectly circular arrangement: BSE listed on NSE, and NSE listed on BSE.

But there is a bigger reason NSE wants its shares to trade on its own platform.

It has to do with the Nifty.

Historically, securities generally needed to be listed and traded on NSE to qualify for inclusion in its indices. That would have created a problem for NSE itself because it could not formally list on its own exchange. But in 2019, NSE Indices changed its methodology to allow securities admitted under the Permitted to Trade category to become eligible for index inclusion, provided they satisfy the relevant requirements around market capitalisation, liquidity and free float.

If NSE lists on BSE and its shares are also permitted to trade on NSE, the stock could eventually qualify for inclusion in major NSE indices, including potentially the Nifty 50, if it satisfies all the other eligibility requirements.

Some mutual funds and ETFs have mandates that require them to replicate the index. And there are several ETFs and mutual funds that specifically track the index.

So if NSE eventually becomes a Nifty 50 constituent, these passive funds would have to buy the stock as part of their portfolios. That could create a large pool of automatic demand, improving liquidity and potentially supporting the stock's valuation over time.

There is an amusing twist here, though. NSE owns NSE Indices, the company that operates the Nifty indices. The exchange could become a constituent of an index operated by its own subsidiary.

SEBI has already recognised this problem. Stock exchanges are classified as Market Infrastructure Institutions, or MIIs, and their operations fall into three broad verticals: 

1. Critical operations
2. Regulatory, compliance, risk management, & investor grievances 
3. Business development

SEBI's framework explicitly says that public interest, represented by the critical and regulatory functions, must take priority over commercial interests and business development. The regulator has also required strong information barriers so that sensitive regulatory information cannot flow from the regulatory side of the exchange into its commercial operations.

In other words, India is effectively trying to build walls inside the exchange itself. The people responsible for keeping the market safe should not be able to use confidential regulatory information to make commercial decisions. And this separation becomes even more important once the exchange has public shareholders who naturally want higher profits and dividends.Its subsidiary, NSE Clearing, sits further down the financial chain and handles the clearing and settlement of trades. Under the current regulatory framework, at least 51% of a recognised clearing corporation must be owned by one or more recognised stock exchanges. That is why clearing corporations such as NSE Clearing and BSE's Indian Clearing Corporation remain closely tied to their parent exchanges.

But this creates a conflict once NSE becomes publicly listed. NSE's shareholders will want the clearing business to maximise profits, while NSE Clearing's primary responsibility is to protect the financial system, even if that means spending more money and earning less. 

This is where shareholder incentives collide with financial stability.

And SEBI has historically viewed these institutions as too important and too risk-sensitive to be listed. But when the parent exchange becomes a listed company, investors indirectly acquire an economic interest in the clearing business.

SEBI recognised this tension in 2024 when it proposed changing the ownership and economic structure of clearing corporations. The regulator noted that the current model, where clearing corporations are subsidiaries of their parent exchanges, can expose them to the expectations of shareholders in those commercial parent companies. It therefore proposed a more diversified ownership structure to give these systemically important institutions greater independence.

The London Stock Exchange, for instance, separated the listing authority from the exchange before its own public listing. Singapore created SGX RegCo as a separate regulatory subsidiary, with its own board of directors, and it reports to both the parent company’s board and the Monetary Authority of Singapore (MAS). The NYSE also created an independent regulatory arm to separate market oversight from its commercial operations.

India has chosen a different approach. Rather than completely removing regulatory responsibilities from exchanges, it has built layers of oversight around them through public-interest directors, functional segregation, information barriers and direct SEBI supervision.

And perhaps that is what makes the NSE IPO so interesting. It is whether public ownership can coexist with the neutrality that a stock exchange needs to function as a referee.

India's regulatory architecture attempts to answer that question through structural separation. If it works, the NSE IPO could become a case study in turning critical financial infrastructure into a public company without compromising market integrity.

Until then...

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