The National Stock Exchange (NSE) of India is making significant strides in diversifying its product offerings, having recently secured in-principle approval from the Securities and Exchange Board of India (SEBI) to launch electricity derivatives. This announcement was made during an analyst call on May 7, 2025, following the exchange's fourth-quarter earnings report.
While the approval marks a crucial step forward, the NSE's management cautioned that the initiative is still in its infancy. "We have just about started the process. We have the in-principle approval, and the terms of the contract are still being discussed with the regulators. There is a lot of capacity building required before launching this product," an official from NSE stated during the call.
The proposed electricity derivatives are expected to feature shorter tenures, such as monthly or half-yearly contracts, reflecting the preferences of Indian regulators. This approach contrasts with the yearly contracts commonly found in several other countries. As the management explained, "Indian regulators favour introducing shorter tenures—such as half-yearly or monthly contracts—while in several other countries, yearly contracts are common." This development is seen as a pivotal move, as power derivatives are among the largest commodities markets globally, potentially allowing power buyers, sellers, and producers in India to hedge their price risks more effectively.
In terms of regulatory oversight, SEBI will govern the derivatives market, while the spot market remains outside its jurisdiction. This distinction is crucial, as the electricity derivatives market will differ significantly from the spot electricity markets operated by exchanges such as the Indian Energy Exchange (IEX).
Management at NSE expressed confidence in its technological capabilities, believing that it holds an advantage over competitors in the market. "We believe NSE has an advantage in this market due to its advanced technology compared to many other players," they noted. This technological edge is expected to enhance the efficiency and reliability of the new electricity derivatives product.
Additionally, NSE's management addressed concerns about potential market share losses in the derivatives segment to rival Bombay Stock Exchange (BSE). Following recent regulatory changes by SEBI that limited weekly expiries to one benchmark per exchange, the NSE believes that it will not experience further losses in market share. "The market share loss part has run its course now, given the fact that everything that had to happen has happened, hopefully. And so, unless the new other measures come that specifically target only NSE, we seem to believe that this is pretty much the market share," the management stated.
As the NSE gears up for the launch of electricity derivatives, it is also navigating the regulatory landscape concerning its initial public offering (IPO). As of February 28, 2025, NSE had not yet received feedback from SEBI regarding its IPO application, despite having responded to the regulator's queries in March. The NSE has been seeking a no-objection certificate to file a draft red herring prospectus (DRHP) for the IPO, and management remains optimistic about progressing in this area.
In tandem with these developments, NSE is planning a significant expansion of its co-location facilities. The exchange has been receiving a steady influx of applications from entities seeking co-location rack space, resulting in a backlog. To address this demand, NSE plans to add 300 new racks by the first quarter of fiscal 2026. Furthermore, the exchange is set to expand its co-location facility by an additional 2,000 racks, with the total cost for this expansion estimated to range between Rs 520 crore and Rs 550 crore. This project will be executed in phases to ensure a smooth rollout.
The introduction of electricity derivatives, coupled with the expansion of co-location facilities, positions NSE to capitalize on emerging opportunities in the Indian financial market. As the exchange continues to innovate and adapt to regulatory requirements, stakeholders will be watching closely to see how these developments unfold.
