The Bombay Stock Exchange’s journey from being a brokers’ club to becoming a professionally managed entity seems to have got derailed once again, with a spate of resignations in the past three months. Just two months ago, BSE’s non-executive chairman Shekhar Datta and shareholder-director Jamshyd Godrej quit the board. Last week, Rajnikant Patel, the managing director and CEO of the 133-year- old exchange, put in his papers. While Mr Patel has cited “personal reasons” for his resignation, market gossip suggests that the interference from brokers in the management of the exchange is the probable reason for some of these resignations.
It is important to remember that Asia’s oldest stock exchange was run as a fiefdom of brokers for the longest part of its history. Whether it was computerised trading in the 1990s or the de-mutualisation and corporatisation of more recent times, BSE has brought in changes only as a reaction to competition from its upstart rival, the National Stock Exchange. Market regulator Sebi has had to step in twice because of supervision and surveillance issues. In 1999, Sebi sacked BSE’s president J C Parekh for lax supervision, which had led to rampant price rigging and a payment crisis. In 2001, Sebi sacked the entire BSE board on surveillance issues. Through history, BSE’s executive director, the professional officer responsible for running the day-to-day operation of the exchange, has had several run-ins with member-directors. Since 1993, when M R Mayya completed his second five-year term, no other executive director has completed his term in office.
In sharp contrast, since the National Stock Exchange began its capital market segment in 1994, it has gone from strength to strength. In 1995, within less than a year of its starting operations, it had become the largest stock exchange in the country. Last Friday, NSE’s capital market turnover was Rs 12,533 crore, more than twice that of BSE’s Rs 5,432 crore. In the derivatives segment, BSE’s volumes were negligible at Rs 17 crore while NSE’s futures and options turnover stood at Rs 47,120 crore. NSE’s indices, through a joint venture with Crisil, are actively traded in India and Singapore, while the BSE Sensex is used only to gauge the heat of the market. One reason NSE is ahead is because its trading members are neither equity owners of the exchange nor involved in the management of the exchange.
It isn’t that in the situation there is no valid role for BSE, but it needs to get its act together quickly. For the last 15 years, while the two exchanges have functioned in competition, BSE has continued to have a much greater number of listed stocks, but NSE’s fewer stocks have a total market capitalisation that is quite close to that of BSE’s total. While BSE may have lost its chances in the equity derivatives segment, there are new growth areas that it can explore, be it in commodities (where the exchange has called off its 26 per cent investment in the National Multi Commodity Exchange), currency futures, or a small and medium enterprises exchange. BSE’s brokers need to realise that they are no longer trading under a banyan tree, where the exchange began, or in the back-slapping environment of the trading ring in its glorious past, and that a large organisation needs to be run by professional management with no scope for any interference. It can and should bring directors from investors such as Deutsche Borse Group and the Singapore Stock Exchange, each of which owns 5 per cent. It also needs to see that its professional officers stay long enough with the exchange to bring in the necessary changes. Broker members can only gain from such changes; as a group, they still own 49 per cent of the stock exchange, and it is in their interest that the exchange’s management creates long-term shareholder value.
