Burnishing brand BSE

It’s been the toughest two years at the helm of Asia’s oldest stock exchange —  Bombay Stock Exchange (BSE) for engineer-turned-economist and management expert Managing Director & Chief Executive Officer Madhu Kannan. 

It seems destined that Kannan, a former head of Business Strategy at New York Stock Exchange (NYSE), take over the reins at a time when the country’s premier bourse so synonymous with India’s Commercial Capital’s and Maximum City’s Dalal Street, was caught in the throes and thrall of major credibility crisis — suffering from perceptual and systemic issues.

Brokers members not only ran proxy management, they were also known to pass vital market information to punters selectively. That apart, manipulation in small company shares on listing day, technical snags and rate card for getting scrips in and out of circuit filters, besides lack of initiatives to revive dormant equity derivatives also dented the image of the 136-year old bourse.

Enter Kannan, whose mandate was to put in a strong governance structure in place.  So, he puts in a team at BSE which skillfully set out to tackle the issues that beset the bourse and has been successful in its various efforts to shift some paradigm positively.

The first phase of BSE’s turnaround is over but the positive effects of them could be seen in another two years or even earlier, points out Kannan adding: “What you see (in BSE) is a 136-year-old institution now displaying the tenacity and energy of a start-up, albeit quietly and surely.”  There will be more action at BSE, he indicates, as it steps up execution of more new initiatives in the next phase, which may lead to volume rise as a visible proof of the success of turnaround at the exchange.

Strategic steps

Prior to his joining, BSE had focused primarily, on a single asset class, despite presence in many more. “You cannot project BSE as a stand-alone trading platform,” says Kannan and expect to be in line with global players. For that BSE had to consolidate its business and project itself as an integrated financial service provider with solutions across the transaction value chain.

So, BSE took several steps which led to having greater control over its depository, technology and a strong web-based distribution network. For instance, BSE which promoted CDSL (Central Depository Services Limited) and also shares common infrastructure as part of the same heritage upped its equity from 40 to 54.2 per cent.
It financed and set up clearing business called Indian Clearing Corporation(ICCL) required under the demutualisation scheme.  Technology being a key differentiator in the exchange business competition-wise, BSE opted to strengthen it through acquisition of techie firm, MarketPlace Technologies.  As an SRO (Self Regulated Organisation), BSE strives to roll-out new globally benchmarked products and services for the benefit of Indian market, says BSE Deputy CEO Ashish Chauhan.  

Its recent initiatives include mobile-based trading, mutual funds transactions, web-based IPO services, co-location services, international exchange tie-ups to explore cross-licensing of indices, low latency market feeds, faster turnaround times, and higher order capacities, besides Smart Order Routing (SOR) which allows traders to choose between exchanges for best price before executing orders.

Earlier, the National Stock Exchange (NSE), leader in equity trading, had clamped restrictions on the flow of orders from its co-location facility to other exchanges citing risks. Kannan explains it took almost over a year for BSE to introduce SOR after it first started pursuing it, while the absence of SOR and cross-exchange algorithm trading had cost BSE dear as traders will have to take permission again before they start routing their orders.  Algorithm volumes account for over 25 per cent of the overall market volumes now.

Introduction of SOR, Kannan believes will shift volumes to BSE as it is a better destination for prices sometimes. “This is an investor-friendly move and it is important that orders are allowed to be routed the better destination.  

As such, member firms who wish to avail this should be permitted to use SOR at the earliest by the exchanges.” Kannan also took measures like cutting deposit-based membership fees by 90 per cent to Rs 10 lakh, which generated an addition of over 550 memberships from different states across the country, while 360 of these new members are already on board and the remaining in various stages of registration. The idea is to maximise BSE reach across the country and explore the potential of the untapped areas, leading to volume rise.

BSE under Kannan taken several measures like changing settlement cycle for its derivatives segment to mid-month expiry and announced physical settlement in the derivatives segment. Initiatives like mobile trading, new BOLT terminal, Fast Cast, E-Cast and pre-open trading in common scrips, besides faster processing systems, have seen significant action at BSE. Also, it is in the process of setting up a major data-recovery and risk-management site in Hyderabad.  It already provides co-location facility at less than half the cost of NSE, says BSE spokesman Rohit Khatua.

Those who understand exchange business have shown confidence in BSE in these two years as is evident from some of the world’s largest investors, including George Soros, Thomas Caldwell to mention few have showed interest in picking up stake in BSE.  Shares of BSE (not listed though) are trading now at Rs 230 a piece, substantially at a discount to the acquisition price of new BSE members.

Regulatory changes

Notwithstanding initiatives pursued by BSE in the last two years, NSE still corners the chunk of trading volumes and analysts tracking BSE say that it is headed nowhere. Apparently, NSE must have done lot more ‘right’, than BSE did ‘not’ in those years. For one, NSE which began operations in 1994 overtook BSE in the very next year in volumes and the factors helped maintain its lead include a low-cost structure due to use of the latest technology.

BSE also lost out to NSE in the F&O race.  Though BSE was first to introduce index-based futures in June 2000, it didn’t catch the fancy of investors the way individual stock futures launched by NSE in November 2001 did — the market perceived it a more efficient substitute for ‘badla’, the stock carry forward system that was popular on BSE then.  

According to Kannan, there has been a shift in market segmentation over the last few years. Cash market volumes have declined considerably to less than 4 per cent of the overall volumes, he ascribes it to regulatory changes.  As a result says he: “there is a shift of investor interest to these new segments (Futures & Options), especially in these inflationary times coming just after a 2-year recession.”

In the given situation, it is absolutely critical that BSE gain share in the F&O segment and also maintain or rather grow share in the cash market.  So, BSE recently launched delivery-based derivatives in order to introduce, a globally-tested and popular mechanism in the futures market.  The SME exchange, for which it got Sebi nod last week, to be launched in the current fiscal, will also aid in growing the market in terms of avenues for investors.  “Our efforts to drive higher financial literacy and thereby organically grow the investor base itself are on.”

Brokers’ club

Let’s face it.  It wasn’t easy for any one to break into ‘brokers club’ (BSE) and run it professionally.  The market grapevine then had it they (brokers lobby) forced the previous incumbent Rajnikant Patel to step down because he had paid Rs 50-75 crore to the brokerage houses for market making. Quiz him on brokers: “So far, so good,” says Kannan adding: “I believe brokers are important and an integral constituent of BSE.”  They are as keen as anybody in D-Street keen to restore BSE of its primacy in the market, says he.   It would not be out of place to mention that the BSE Chief in the last two years seems to have earned some friends from the broking community. Amit Majumdar, Executive Director at Angel Broking says: “With Kannan at the helm of BSE, we have surely seen a marked improvement in their approach to relationship building. More importantly, the exchange has become extremely receptive to the views of the member brokers. The exchange has been actively partnering us in our investor education initiatives too.”

Several proactive steps are being taken by them to enhance market share, says Majumdar adding: “The BSE that we know of today is far more professional in their approach than it used to be.”

Majumdar believes that the biggest challenge for BSE is to garner enough market share in the derivatives segment, while holding onto its cash segment market share. NSE has a leadership position already in derivatives and hence, attracts liquidity, he points out adding: “This is a unique “chicken & egg” situation for BSE to tackle.”   Also to capitalising brand Sensex will be another challenge for BSE among foreign trading community, where NSE Nifty is more popular already. Yet another challenge in near future for BSE is to protect its turf from being encroached by newer rivals like MCX whose foray into equity trading has been withheld by Sebi for the time being only.