finance

The Indian energy sector is expected to see considerable growth over the next decade. In this high-growth environment, independent and liquid secondary marketplaces have become a necessity for actors to access capital. Therefore, in December 2017, the Union Cabinet approved the establishment of the Indian Energy Exchange (IEX)—a stock exchange for trading in listed securities and derivatives of energy companies operating in India. This new stock exchange will provide a mechanism for capital allocation within the sector by allowing investors to trade shares in public companies that operate in the energy space. This blog takes a look at some key things you need to know about IEX as it undergoes its first phase of operation starting on April 6, 2018. What is the Indian Energy Exchange? An Indian energy exchange is a stock exchange for trading listed securities and derivatives of energy companies operating in India. IEX will build a transparent market for the trading of listed energy companies in India. To do this, it will provide a mechanism for capital allocation within the sector by allowing investors to trade shares in public companies that operate in the energy space. In the early years of the Indian economy and energy sector, there was no specific organized mechanism or platform for trading shares in the energy companies. In response to the growing demand for secondary market trading, the Exchange and Brokerage Departments of the National Stock Exchange of India Limited (NSE-EB) and the Securities and Exchange Board of India (SEBI) have come together to launch the Indian Energy Exchange (IEX) with the objective of making listed energy companies more accessible to investors. Objectives of IEX The primary objective of the IEX is to facilitate secondary market trading in listed shares of companies operating in the energy sector through a transparent and regulated exchange. IEX will enable investors to trade shares in public companies that operate in the energy sector, including oil and gas exploration and production companies, power companies, oil marketing companies, and gas storage companies. The secondary market trading on the exchange will help increase liquidity and widen the investor base, thereby making it easier and safer for investors to invest in listed shares of companies operating in the energy sector. With the increased liquidity on the exchange, investors will also be able to hedge their energy portfolio risk by entering into short or long term energy derivatives contracts. Using the same platform, investors will also be able to buy and sell energy-linked exchange-traded products such as energy index futures or options. Key features of IEx – A stock market for listed energy companies in India – Transactions in energy-related shares are free of charge – Trading of energy-linked products – A liquid market with a strong support mechanism – A transparent market with a varied basket of securities – More than 50 industry-specific indices for benchmarking – A robust and sophisticated trading system – Dedicated customer service channels – Preservation and dissemination of traditional financial market knowledge – Compliance with securities laws and regulations – Strong investor protection mechanism – Strengthening of India’s financial infrastructure Who can trade on IEX? The exchange will offer trading in shares of listed companies operating in the energy sector. The exchange will have a basket of listed securities for trading, including stocks of exploration and production companies, power companies, oil and gas marketing companies, and gas storage companies. Investors can also trade in energy-linked products, such as futures and options on the commodity indices underlying the basket of listed securities. The exchange will also offer trading in index-based products such as equity index futures, equity index options, and equity index options on the commodity indices. To get access to the trading platform, investors will have to register with the exchange as a trader. After registering, investors can deposit shares in companies that operate in the energy sector or buy shares in companies that operate in the energy sector. How to register on IEX? Investors can register on the exchange as an entity or as a retail investor. The registration process is similar to that of a financial broker. Once an investor registers with the exchange, they will be given a unique investor account number on the exchange. This number will be the same across all the exchanges where the investor trades shares. Investors can then log into the exchange website and create an account with the username and password they have chosen. After logging in, investors will see the trading platform on the exchange. For trading, investors will have to select their username and password in the exchange website. Once investors have registered on the exchange, they will have access to the trading platform. Trading Platform and Pricing Schemes The exchange will have a variety of trading mechanisms, including a modern trading system, a robust risk management system, and a robust market surveillance system. The trading system on IEX will be based on the NSE-EB and SEBI trading systems. The exchange will have multiple price mechanisms for trading in listed securities. Market makers and liquidity providers can trade on an Athens-like auction-based price mechanism. In contrast, the exchange will have a continuous auction-based price mechanism that is based on the NSE-EB and SEBI reference rates, which is based on the interbank offered rate (IBOR). Conclusion The Indian energy sector is expected to see considerable growth over the next decade, driven by a rapidly growing economy and increasing energy demand. As a result, the market is expected to become highly attractive for investors. The Indian energy sector, however, remains highly fragmented and lacks a strong secondary market for trading shares. The Indian Energy Exchange will create a liquid market for trading shares in listed energy companies that will be open to both institutional and retail investors.