The London Stock Exchange, the world's third largest exchange in terms of value of shares traded, is in talks with Financial Technologies to buy a stake in its stock exchange arm MCX-SX.

The FT group's MCX-promoted exchange currently runs currency derivatives trading, which started in October 2008, and it is awaiting regulatory approval to begin equity trading. As a part of licensing conditions, the group will have to start divesting its stake by the end of the first year of operations. MCX is already in talks with several global investors, of which LSE is one.

According to Securities and Exchange Board of India guidelines, overseas players, including stock exchanges, can invest up to 5 per cent in Indian stock exchanges.

The precise nature of the discussions between FT and LSE could not be established, but the London exchange is understood to have asked for a 5 per cent stake.

An LSE spokesperson declined to comment on the discussions but said, "We have a strong commitment to the Indian market and feel certain that the country will continue to be at the centre of our international business."

After overcoming a takeover threat in 2007 from Nasdaq, LSE has been focusing on expanding its presence outside London.  It recently acquired Italy's leading stock exchange, Borsa Italiana.

An FT spokesperson declined to comment on the issue. In a recent interview, however, Jignesh Shah, vice chairman, MCX-SX, said "MCX-SX is based on the 'India Model' with the best global equity partners, alliances and practices."

Sources said a deal between MCX and LSE has the advantage of synergy. Apart from the main equity business, MCX-SX plans to launch a segment for small and medium enterprise on its stock exchange. LSE runs one of the world's most successful SME trading platforms - the Alternative Investment Market - on its exchange. Many Indian companies are listed on AIM.

For LSE, the deal would be crucial if it wants to be an equity partner in an Indian stock exchange. The 16-year-old National Stock Exchange and Bombay Stock Exchange, one of Asia's oldest exchanges, have little room to expand their equity bases to accommodate another overseas exchange.

The New York Stock Exchange holds five per cent in NSE and Deutsche Borse of Germany and Singapore Stock Exchange hold five per cent each in BSE.