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Can't Compare NSEL with Other Exchanges

Investors should only deal with highly-regulated exchanges, says Ashishkumar Chauhan, Managing Director and CEO at Bombay Stock Exchange (BSE)

After the recent crisis that hit the National Spot Exchange (NSEL), do you still believe that Indian stock exchanges have strong systems?

Firstly, NSEL was not a stock exchange it was a commodity spot exchange, so it's not the same thing to compare. I would put it the other way round; that despite the crisis at NSEL, problems did not spill over to other exchanges as we have very robust and transparent systems in place.

Speaking about the system, there are several aspects to the actual system framework and one of them is fairness and efficiency of the trading system. The Indian stock market got automated in 1994-95 and we were much ahead of the world (later many countries adopted the automation route). Secondly, we also created clearing corporations and gave settlement guarantees for which market regulator Sebi should be applauded. Even for the margining methodology, be it real time risk management, client based margining and equity derivatives or currency segments all have different margining system.

Many say that the Indian margining system is over-margining and that is being very risk averse, but that is very important to keep the market robust. Each clearing corporation has got its own 'settlement guarantee fund' which is sufficiently large. One should remember that even in the crises faced by Indian markets in the past we didn't have any default or loss of money to investors due to brokers' default. Above all, the BSE also provides ₹15 lakh guarantee through its investor's protection fund to each investor which is much bigger than what banks give to their investors. The settlement cycle has also come down from 15 days to two days in the past few years. So, all the three aspects from automation of securities to strong clearing corporation and finally settlement are managed very comprehensively.

What are the key takeaway and lesson learnt from the NSEL crisis?

There are several lessons learnt. From the investor's perspective, they should only deal with highly regulated exchanges or segments in the financial markets. Before entering into any contact they should do their own due diligence, look at the margining system and collateral management. Investors should be very vigilant. Any regulated entity which is regulated, tends to be more systematic and more compliant and adhering to laws of the land. Idea here is whether regulatory agencies approve or disapprove of such products in exchanges. Lastly, there is need for periodicity of audit not only by the company but also by the regulators. Regulators need to ascertain whether they are able to meet their obligations or not. They should also be wary of giving clearances to entities that have dubious shareholding pattern and weak capital structures.

How can an exchange provide safety to small retail investors?

An exchange can provide safety to investors in many ways. It should have the ability to see whether an order was placed at the correct time or to know which trade took place at what time. Investors can visit the website of exchange through their order number on the contract note to check if orders are correctly placed or not. If we have the mobile number and email ID, we immediately inform investors about their order status for them to be aware.

Secondly, exchanges even provide investors to place order through mobile and see the prices of that particular stocks and that is what I call transparency and order execution aspects. In terms of information availability, whenever companies give us any information; it is directly uploaded on our website so that investors can take an informed decision. In terms of grievance redressal; if any investor has any grievance against brokers or the exchange, they can directly write to us or post on Sebi's website. There are several grievance redressal committees across the country under Sebi with eminent personalities in the committees to resolve issues with brokers.

There is also the provision to go for arbitration if an issue goes unresolved otherwise. If the arbitration size is below ₹10 lakh, the exchange pays the arbitration fees for the investor. What I wish to state is that there are many safety layers and security from the transaction processing perspective. These are well established processes and they have been in existence for the past two decades.

What's the status on the BSE IPO and when do you plan to go public?

We applied to Sebi for an in-principal approval in January 2013; as and when the approval comes we will start the process.

The currency derivatives segment has seen a pick up in the last few months on BSE. Is it only because of waving of transaction charges for the first six months?

No. It's a combination of several things. The BSE was the fourth entrant in the four exchange race after six years. Competition between the MCX-SX and National Stock Exchange (NSE) started in 2008 and we entered only in early 2014.

As a relatively new player it's never easy to move liquidity from one market to another, unless you have something different to offer. Cost usually is not always the only mover, there are other factors and in this case it is superior technology and better services. Our new technology works on a 200 micro second response time and is practically ten times faster than what any other exchange offers in India. In the financial market, it's very important that the 'first bird gets the worm'. We were also not expecting the currency markets to pick up so fast because we did not have a tradition of currency trading in the past.

We thought it will take some time to get people, but we started getting people from the very first day and now it is the second largest exchange. In fact we are close to becoming the top exchange based on daily turnover. Most participants were not eager to come to the BSE because we were slower than NSE. But with the technology that we have deployed, for the next 20 years we will be faster than our competitors and soon more people will come to us.

I believe that for stock exchanges, the only differentiator is speed of execution and now that we are fast we have seen that impact in the currency segment. We have decided to continue with the waiver of transaction fee till November and then decide on the next course of action. If you recall, both NSE and MCX did not charge fees in the currency derivatives platform for the first three years. What I mean is that waiving transaction fee when launching a new service is not new.

As the head of a stock exchange, what steps have you taken to increase retail investor's participation?

Even now we have only 2 per cent of investors coming in to equity markets and the number of investors almost remain the same of what it used to be two decades ago. We have not been able to attract retail participation in equity markets. The processes are much simple now, yet we have been unable to gain the confidence of investors. I would stress that investing in equities is the most effective investment vehicle. However, it requires a lot of education and information that potential investors need to undergo.

We try and conduct seminars and various investment awareness programmes. We do around 2,500 seminars across the country in a year. In March 2014 we started a one hour programme every trading day from 9AM to 10AM on Doordarshan National News on financial inclusion. For us, it's very important to educate youngsters and make them understand how the investment process works and how they can benefit from investing.

Why is that compared to the NSE, the BSE remains to be a marginal player in the derivatives segment?

After 2001-2 when the regulator allowed trading in derivatives, the BSE didn't think it was a good product for India and didn't work out any strategy. Till 2011, we had a zero per cent market share in equity derivatives and by then it had already become a large product. From 2011 we started working seriously and introduced the derivatives segment into the BSE. Today, we have 26 per cent market share in the derivatives segment and BSE is the fourth largest exchange in the world in terms of index options. BSE has done exceedingly well in last three years in terms of achieving derivatives volumes on our platform. With our new trading system 'Bolt Plus' we provide a 200 micro second response time with a through put capacity of five lakh orders per second. I would say that, BSE is actually gaining huge ground in the equity derivatives structure. I believe at 26 per cent we are very much in the race, we are well established in this segment and all we need now is to ensure that we attract more investors.

We are market leaders in many areas such as mutual fund distribution through exchanges, where we have 80-90 per cent market share and in the offer for sale we have 90 per cent market and in the SME platform we have 90 per cent market share. So there are many areas which have come up recently and BSE has taken the lead by giving superior technology and services. Further, in the past three years more than 90 per cent of corporate debt collected is through BSE. We take our role of being a catalyst for capital formation very seriously vis-à-vis only a trading venue. We think a stock exchange has to be an investment venue and we want to become the investment exchange to India and not a speculative exchange. Like I said; our heart is in creating capital formation for India.

The SME platform on the BSE is yet to find a proper foothold. What steps are you taking to increase participation?

I think the SME sector is very interesting and is important. But Sebi regulations do not allow small investors by restricting minimum lot size of ₹1 lakh to invest, which further restricts participation to only well informed investors. Till now around 55 companies are trading on the platform and another 15 companies are in the various stages of initial public offer (IPOs).

We assume that these 15 companies may get listed in next few months. The combined market capitalisation of the existing 55 companies is over ₹6,000 crore, which is an important landmark for us. We hit this figure in the first week of April, 2014; two years after launching this segment. The SME platform is helping entrepreneurs create wealth for themselves as well as investors. In fact our BSE SME IPO index which was launched in 2012 December has given returns of approximately 7 times in the last 15 months.

We think that the prospects of the SME sector are very bright in India and it has the potential to become something like the NASDAQ in India where companies with new ideas can come and raise money. I think all the 55 companies that are listed on the exchange act as catalysts and model for other entrepreneurs that they can list their companies and raise finance and grow. They demonstrate the possibilities that exists for new and small companies. Companies that are listed on the exchange are taken more seriously; they are also known to be disciplined, transparent and even banks treat them with respect. I believe this is just the start for the SME segment and it will grow going forward.

Despite the steps taken to increase Independent Financial Advisors (IFAs) and distributor participation to sell MF units on exchange; the response has been tepid. What's the way forward for BSE StAR?

The mutual fund distribution through the stock exchange is a three year old concept. But, distributors and IFAs were allowed to use this platform only a month ago. So, it's a very short time to arrive at a conclusion on the success of the platform. But I would say that our BSE StAR platform has an average daily turnover of ₹100 crore and the BSE has a market share of 90 per cent market share.

I believe this is an important milestone because on the one had fund houses are losing their folios on a regular basis and on the other, our daily turnover is increasing. The number indicates that we are getting responses, which will only further increase in the months to come. We have created various systems for distributors and investors so that they can have a seamless transaction journey. I think it is a matter of time for this platform to grow and become a dominant player. Also, our aim is not to earn revenues out of the platform but ensure that everyone from fund houses to brokers and investors get fast movements of their units. We will continue to build additional features and ways of connecting to more investors and distributors in faster ways.

Currently we are having seminars with various agencies and distributors to come and transact through our platform. But looking at the current scenario it looks that distributors and IFAs are quite worried about their own future and the way the fund industry is going. New investment structures where investors can go direct to fund houses and invest and fee structures are making them anxious as many investors have started going direct to fund houses.

The major advantage for distributors and IFAs to use our platform is that it provides for schemes from most of the fund houses which is not possible to do manually. So if they come to the BSE platform they basically become distributors of almost all the fund houses. It also takes away the major hassle of interacting and integrating with all the registrars because they can place orders directly from our platform. Even investors, besides distributors can invest and redeem their mutual fund units through their mobile phones on a T+2 day basis. The platform does away with any uncertainty, as many see this process as following a manual transaction. Even the fee is practically zero and is a good proposition for fund houses, distributors and IFAs.

How do you measure the success of an exchange?

Its very interesting and fundamental question. One needs to answer this every year and every day based on the model on which exchanges exist in India. And, why society should allow the exchange to exist? For me the answer is very clear that exchanges are catalyst for forming capital in the country in a dis-intermediate way. While on the other hand banks and other institutions follow the intermediate way. In its history of over 139 years, the BSE has helped create 1.3 trillion dollars of wealth. Even internationally the wealth that is generated by investing in stock markets has given the best returns and has also helped countries create jobs. It is very important for an exchange to have a trading platform, but basic context under which they operate is capital formation and raising funds and not the trading volumes they generate.

What is the way forward for BSE?

If we look back at the history of BSE, it was a traditional equity exchange till 1994 and for over 120 years it acted as a floor based exchange and was basically an association of people. In 2005 through a government gazette notification it turned into a corporate entity. Since then we have seen this established exchange changing its technology, product offering and services.

From being primarily an equity only exchange; it has forayed into different products ranging from equity to currency derivatives, interest rate futures, mutual fund platform and SME exchange. Over the last 20 years we have changed our organisation and the technology that runs the exchange. Today, we have introduced a new trading platform; 'Bolt Plus' and in the past few years have taken many steps to improve the services for investors, companies and stock brokers.

Going forward we will continue to perform our function, which is to provide capital formation, bring in newer technology and processes and create markets which are more fair and efficient. Our recent activities are more focused on technology and we will get into the hinterland and attract more people to the markets through investment awareness and financial literacy. The aim is to bring more and more retail investors to equity investments as this is one of the best investment vehicle to generate long term capital.

This interview appeared in the May 2014 Issue of Wealth Insight.