The future appears bleak for the Bombay Stock Exchange, the oldest in Asia. The exit of Wall-Street-returned Madhu Kannan, after three-odd years as managing director and chief executive is only one reason for this.
Shareholders of BSE said the Securities and Exchange Board of India’s (Sebi) new regulatory regime, announced earlier this month, has put a spanner in BSE’s turnaround drive. Listen to Thomas Caldwell, Toronto-based chief executive officer (CEO) of Caldwell Securities, which owns five per cent in BSE: “The shifting sands of regulation will make it difficult for exchange executives to operate and execute plans. Support for BSE could have come from top global exchanges like Deutsche Borse, a shareholder, but new regulations do not make it interesting enough and are pro-monopoly.’
Others said BSE was already in a fragile state and the new regulations would make the situation worse. Cash market volumes are down to just Rs 2,000-Rs 3,000 crore due to lack of trading interest in small and mid-cap stocks. While activity in the derivative segment has picked up, it is anybody’s guess whether this will continue after the market-making scheme. Currently, futures and options in excess of Rs 10,000 crore are traded daily.
| COUNTING CASH BSE average daily turnover (month-wise) | ||||
| Month | Derivatives Rs crore | Mkt Share in % | Cash Rs crore | Mkt Share in % |
| Jan | 3,109.8 | 3.0 | 2,385.3 | 18.2 |
| Feb | 21,721.0 | 14.1 | 3,494.4 | 17.7 |
| Mar | 10,395.1 | 7.1 | 2,845.1 | 18.9 |
| Apr | 15,269.4 | 14.4 | 2,214.0 | 18.0 |
| Source: BSE; Data compiled by BS Research Bureau; Remaining market share belongs to the National Stock Exchange | ||||
| Challenges for the new CEO | ||||
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Although the details are awaited, Sebi has broadly said exchanges would have to transfer 25 per cent of profit to a settlement guarantee fund (SGF) of clearing corporations (CCs). However, an exchange cannot have more than 51 per cent stake in clearing corporations, which should have a Rs 300-crore net worth criteria.
This is a double whammy for BSE. Apart from transferring profit, it will have to infuse more capital in clearing corporations to meet the net worth criteria. The impact of this will be seen on its bottom line. Going by last year’s profit , BSE would transfer around Rs 50 crore to the SGF, which already has Rs 5,000 crore in its kitty.
“This is a money grab. We would not have taken two seconds to decide against investing in BSE if we knew Sebi will come up with such rules,” said Caldwell.
Already, BSE faces a direct threat from a new competitor if Sebi decides to clear the decks for MCX-SX. According to Sandeep Parekh of Fincec Law Advisors, which advises MCX-SX, BSE’s future hangs in balance. “My crystal ball shows a dire future for BSE, unless the stars align differently than they currently do,” he said.
Parekh believes a limit on ownership by any single shareholder is a problem for BSE.
Another executive from a leading global exchange, which owns five per cent stake in BSE, said: “Among the shareholders of BSE and NSE are some of the world’s richest institutions. What kind of strategic partner will be interested in helping BSE revive with a 15 per cent stake as mentioned by Sebi? Initially, we had been told the regulator would consider allowing a foreign stock exchange to buy at least 26 per cent stake.”
Global investors had taken note of some of the measures taken by BSE in the past couple of years under Madhu Kannan. US hedge fund legend Geroge Soros and philanthropist George Kaiser picked up five per cent stake in the exchange. Kannan and his team’s strategy was to project BSE as a complete solutions provider. For this, they were consolidating the clearing and settlement, depository, technology and other ancillary businesses to bring cost rationalisation. BSE acquired a back-office trading solution provider, Market Place Technologies, raised stake in Central Depository Services Ltd (CDSL) to 54 per cent and launched a separate clearing house as its 100 per cent subsidiary.
Both BSE and NSE had inked exclusive global alliances with leading exchanges in the US, Europe and Asia. Until now, a little over 80 per cent of BSE and NSE’s revenues came from trading charges, but both were seeking to change their revenue mix.
The new BSE chief will have to undo most of this and focus on bringing down stake in clearing corporations to 51 per cent and in CDSL to 26 per cent.
Spurred by competition, exchanges in Eurpoe and the US are consolidating their business to provide end-to-end solutions. The London Stock Exchange recently bought 60 per cent stake in LCH Clearnet, an independent clearinghouse. NYSE Euronext launched its own full service derivative clearing house in Europe.
The depository business is going the same way and providing solutions to everything related to the stock market business. That was the only way for BSE to move ahead of rival NSE. This, experts said, would not be possible now.
