The National Stock Exchange, the country’s largest stock exchange, is in the midst of introducing new products and entering into tie-ups with regional bourses. Managing Director & CEO Ravi Narain tells Ashish Rukhaiyar and Sidhartha the moves are not aimed at fending off any threat to its dominant status. Excerpts:
NSE has taken a lot of initiatives in the recent past, be it the alliance with the Chicago Mercantile Exchange or the Singapore Stock Exchange. Is this aimed at warding off threat to its dominant status or a part of a larger plan?
The early years with SGX were an effort in understanding the market and the potential. Today, it’s traded across seven-eight exchanges. The Chicago Mercantile Exchange is a culmination of that because the arrangement puts Nifty on the Globex distribution platform that takes it across North America and Europe. In return for Nifty, they gave us S&P 500 and Dow Jones, which for the first time are coming outside America. We can serve our customers well if we gradually bring three-four key foreign products that Indian customers need in their portfolio as rupee-denominated, NSE-listed products.
We think this is the right way to go rather than rush all over the globe and buy exchanges or start new exchanges. Once Nifty is launched on CME, we will watch for a month or so and then start discussions on other asset classes (currency, interest rate futures) and other pieces of the CME and NSE relationship.
What about the alliance with regional stock exchanges?
The regional exchange relationship is a little different.
It relates to this whole effort of doing something with small and medium enterprises. The thinking is that there are a lot of wonderful regional companies that have been languishing on those (regional) exchanges, primarily because their customer base, historically, has been local. Second, smaller companies, by virtue of their size, have not been able to attract enough analysts. That plays into a self-enforcing vicious circle. We are trying to experiment with this. Twenty companies from the Madras Stock Exchange have come on the NSE platform. SMEs, clearly, are a complicated structure. So, no one piece will solve the puzzle.
Does this leave enough room for a separate SME exchange or a platform where there were tie-ups with the likes of SBI and Sidbi?
Yes, it is very much there. The SME platform requires work on the entire ecosystem surrounding SMEs.
How has algorithm trading taken off? Are we moving close to global averages and are smaller players actually coming in?
The response has been reasonable. Of course, it accounts for only a modest share of our turnover. We have to wait and see how well it realises its potential. It is very clear to us that the march of technology is going to be relentless in influencing the course of the markets. What we are trying to worry about, increasingly, is to ensure technology doesn’t remain the preserve of the large members only. For instance, we have split one rack into half so that a smaller member, if he chooses, can pick it up as it becomes more affordable.
You re-launched interest rate futures, but it has not taken off for a second time. What needs to be changed?
The market is reasonably clear on what the deficiency is. One is that the underlying government securities market is illiquid. If the contract design requires it to be physically settled as a basket, it doesn’t seem to work. The market becomes very wary. The buyer is afraid the seller will dump illiquid securities. The market has been signalling that the only product to work in India is a cash-settled IRF product. There are some concerns that the regulator has on the cash settled front.
Currency derivatives is one segment that appears to be gaining steady popularity.
The currency derivatives market has developed pretty well, though it still has a long way to go, primarily because the bulk of the derivatives still doesn’t have a high proportion of the user community. The bulk of the volume is still speculative. Real hedging is still limited.
There has been a lot of debate on transaction charges. Does low or even zero transaction charges in some cases give you or BSE an advantage over the new entrants?
Today, if you take the overall cost to the investor, only one per cent is the exchange fee, 55 per cent is taxes, 44 per cent is DP (depository participants’) and broker charges.
Organisationally, you can structure a company in any way you like. It’s perfectly feasible for an exchange to create a separate company for each asset class or combine them into one company. So, if a different group chooses to divide into companies, it’s the same thing. So, the question really is: What is the group’s ability to develop new markets? And, there you will find no difference. If you look at the pockets of any of the market entities, they are all deep and can sustain themselves for a decently long period of time. If the market needs it, then it needs it. The issue of not charging for a new product has nothing to do with the ability. The first product we launched was debt and we never charged from 1994.
There is a discussion around listing of exchanges and you seem to be of the view that they should not be listed, given that they seem be more than a commercial organisation.
An exchange is a somewhat peculiar animal. It is a commercial organisation, but is also much more than that. If we wanted exchanges in this country to be purely commercial, with commercial rates of return for shareholders, we would need to address the larger public purpose. Can regulatory responsibilities coexist with commercial maximisation of profits? This is an issue which we all need to decide once and for all. Markets outside India that listed had to rapidly let go of their regulatory responsibilities. They recognised there was a conflict of interest. That is the context in which the Jalan committee is looking into these issues. Once the recommendations are out, the exchanges would take a call.
Technology is another issue that exchanges are aggressively looking at. The exchange technology space has somewhat become bitter with allegations and cross allegations. How do you view this, given that you have your own technology arm?
It requires some code of conduct, some rules or framework to guide the exchanges and the connected software vendors on how best to operate. In an ideal situation, there should be truly independent software vendors, or ISVs. But, in India it is not so, and we have to create a framework. Either exchanges do it among ourselves or someone else will have to do it for us. This is also part of the Jalan committee’s mandate.
Do you think there is enough room for more stock exchanges in India? In the US, for instance, where there are quite a few exchanges, each one specialises in a product.
Things will evolve. There are two-three issues in what you are saying. One is that we have firmly come to believe competition is a good thing. We don’t want a monopoly exchange or a monopoly depository. Second, in a competitive framework, nobody can determine ‘x’ is the right number. That’s for the market to decide.
Many entities in the market compare NSE with ‘Fort Knox’. They say you have a ‘monopolistic approach’. What is the reason for such perception and is it fair?
Most emerging markets have one monopoly exchange. India is the only market where we had a competitive framework right from day one. Second, we are the child of competition. Third, market shares are rediscovered every morning.
What we have tried to do ever since NSE started was to see what does the market need, validate it against market voices and needs, and try and build that to provide the best service at the lowest possible price. If that results in higher market share, it’s good for us. But it need not.
Second, are we behaving like a monopoly? From day one, we have been lowering transaction charges. On this market share, we should be raising it. We are listening to people, we keep adding more and more services. Why will we do it if we have a monopolistic share?
