Calcutta Stock Exchange, R.I.P.

While well-intentioned, the enthusiasm of the new BJP government in West Bengal to revive Calcutta Stock Exchange (CSE) is quite misplaced. Over 25 regional stock exchanges have shut down in India since 2012 when Sebi imposed minimum turnover restrictions. The idea was to move trading into large exchanges that possess adequate liquidity for price discovery. Exchanges in Bengaluru, Chennai and Hyderabad have closed, while those in Delhi, Ahmedabad and Pune have ceased independent operations. They all faced a common structural problem of declining trading volumes that increased transaction costs and made operations unsustainable. Getting the Kolkata bourse, inactive since 2013, up and running would be to err on the side of logic. It assumes a special economic dispensation where none exists beyond nostalgia.

Reopening the exchange, which in itself is a formidable endeavour, is the easy part. As a specialised bourse for small companies in eastern India, CSE is setting itself up for a mediocre future. As small companies grow, they migrate to larger exchanges, in effect, draining better assets. Companies growing rapidly need visibility and access to deeper pools of capital. Technology drives modern trading, and small exchanges struggle to make continuous investments in advanced architecture. Fewer regulatory resources and asymmetric information erode investor trust. CSE has experienced all of this. Reviving it will set the downward spiral off again at a large cost to its shareholders, which includes the Bengal government.

West Bengal is seeking to reindustrialise after decades of apathy and needs to improve its investment climate. Struggles of a resurrected stock exchange would be a mixed signal for investors and a digression the state can do without. Since private equity is driving the growth of India's startup ecosystem, the state government could turn its attention to fostering an environment for innovation. It is immaterial where a startup eventually lists, as long as it finds the right conditions to grow in a region.