BSE IPO - Should you subscribe?

It is difficult to think of a brand more closely associated with finance in India than the Bombay Stock Exchange. Founded in 1875, it has the largest number of listed companies in the world. Their combined market capitalisation makes it the 11th largest in the world, on this measure. But it is also a shadow of its former self. The NSE has eaten its lunch, accounting for 85% of trading in the equity cash segment and almost all derivatives trading in India. The BSE's reach is so diminished that it actually makes a loss on its core operations, compensating for it from its investment income which is 29% of revenues. It is also required to pay 25% of its pre tax profits towards the 'Settlement Guarantee Fund' which is used to guarantee payments if a counterparty to a trade defaults. On the bright side, the BSE has the power of its name and history. India is a growing economy with growing savings. Increasing numbers of investors are also shifting to equities with last year witnessing the most number of demat accounts being opened since 2008. Companies tend to list on both the NSE and the BSE despite the former's substantially larger size. Its move to set up an international exchange in GIFT city, Gujarat may yield it rich dividends. The real kicker however, is likely to be its 50% stake in CDSL, a depository which it is required by SEBI norms to bring down. A listing for CDSL is therefore, on the cards. If we account for a lucrative price (a PE of about 30) and its huge cash pile, the BSE's valuation does not look very stretched. However, the BSE's inability to make money from its core operations (listing fees, trading activities etc) hits hard at its investment case. It has lost out on the entire derivatives market and most of the cash market to the NSE. It grew its revenues by a miserable 5% over the past 5 years and each unit of its capital earned an uninspiring 6% return. Its valuations put it about 35 times earnings and 1.8 times book, which is far from cheap. So should you help yourself to a slice of th