Meet the CEO. ‘Stock exchanges should offer risk-free products’

BSE, the 140-year-old stock exchange that introduced the equity culture in India, has come a long way from a group of brokers trading under a banyan tree to its office in Jeejabhai Towers, the indisputable icon of Indian stock markets. Ashish Kumar Chauhan, Managing Director and Chief Executive Officer of BSE, in a chat with BusinessLine, discusses recent developments in the equity markets.

What is the road ahead for BSE?

The main issues facing India today are improving manufacturing, creating jobs, improving defence and so on. The exchange, as a public utility, has to figure out whether it wants to do relentless incessant trading or help channelise the savings of the economy into industry and manufacturing.

Over the last 15 years, exchanges have become more dependent on transaction volumes since they charge transaction charges; this has made them dependent on new derivative products. Internationally, equity volumes have fallen 70 to 80 per cent since the financial crisis. Derivative volumes fell but they have recovered. Even in India, most exchanges have transaction volumes as their main source of revenue. The BSE has taken a call to work more on investments.

We have 95 per cent volume in SME stocks. People ask me, “How is the volume on this platform?” There cannot be much volume on this platform as each company has only 100 to 200 investors. It is an investment product. Almost 95 to 98 per cent of offers-for-sale have been done through the BSE. In the mutual fund platform too we have 97 per cent share. Our recent success in currency derivative is a case in point that the BSE can compete in trading products successfully.

Do you think the SEBI-FMC merger is a game changer?

The BSE announced the plan to set up a commodity exchange last year. In the meantime we have set up two companies, for commodity exchange and clearing corporation. Now this merger has also been announced. We are awaiting clarity on the regulatory framework, whether it will be a new platform on existing exchanges or new exchanges need to be set up.

We see this as part of the implementation of the FSLRC recommendations; that has a much broader perspective. It is certainly a game changer. Practices in the commodity segment will become streamlined and rationalised. Many market participants operate in both segments; many intermediaries use the same technology platforms for commodities and equity. There are, therefore, many advantages to the industry through this merger and also to investors. Minimum criteria for becoming a member, capital adequacy, etc., will be rationalised. It will become easier to understand the trading, clearing and settlement mechanisms in the commodity segment after this merger. All these will have ramifications for the long run, for the better.

How will the new international financial centre being planned in the GIFT city work? Are you setting up a subsidiary there?

We are setting up a new exchange. The model is still being worked out. We are still waiting for regulations relating to the Companies Act, taxation, etc., to be issued. Once the guidelines are out, the BSE along with its partner, Deutsche Borse, will set up a new exchange and clearing corporation in GIFT City. It will be a separate jurisdiction with separate taxation, legal framework and so on.

We have to start with capital of ₹25 crore in the exchange and take it to ₹100 crore over three years. Similarly, for clearing corporation we have to take the networth to ₹300 crore over three years. These are the guidelines laid down by SEBI. It is an interesting opportunity for those who trade in Indian products in Singapore, Dubai or the US. Many of them might want to trade on this offshore platform that offers greater flexibility. We may be able to bring back some volume and business. But the main purpose is to gather investment for Indian companies. Indian companies can raise equity as well as debt from this IFC.

How has retail participation been of late?

It has improved a little. But it is a long way from where it should be. In 20 years of automation we have not really added any new investors although we have improved considerably on transparency in trading, clearing and settlement. In some sense that has been our failure.

We have not been able to reach out to the masses. The perception that market is risky is the main drawback. If you see over the last 140 years, we have offered only risky products — equity. In the last 15 years we have given riskier products — derivatives. We have not given risk-free products.

India saves about 30 per cent of its GDP but only 10 per cent comes to financial instruments. If we provide risk-free products to the masses, they may not be enticed by informal investment and finance channels. The government can do IPOs of government bonds on exchanges through offers-for-sale or other mechanisms where the cost of raising funds is extremely low. If we are able to offer risk-free instruments to the masses, we might take the equity market penetration from 2 to 25 per cent in future.

The government can also raise funds much more easily through equity markets than it can from banks.

SEBI has announced a new platform for start-up companies. Do you think it will work?

It will be an investment-driven product because here too the lot size is going to be large. This is a constant dilemma that regulators and exchanges face — meeting the needs of an enterprise while protecting investors.

Many of the small companies that raise money invariably do not succeed in the long run and get labelled as vanishing companies, as it happened in the early nineties.

Post-1995, BSE and other exchanges decided not to have small companies approach the market and the listing criteria were tightened. But later the government realised that small companies also have legitimate needs to raise funds for their growth.

So, the SME platform was introduced. To protect small investors, the lot size was fixed at ₹1 lakh so that very small investors do not buy the stocks and those who do, have the wherewithal to understand the risk they are taking. This model was found successful, more than 100 companies have listed on the SME platform, about 95 on the BSE itself.

The platform for start-ups is another step in the same direction to allow a particular kind of company to approach the market, but in such a way that their potential failure does not hurt investors.

These are ways to help the company first go public and then help them migrate to the main platform.

What are your thoughts on the call auction in illiquid stocks?

That has been almost removed. Earlier, there were almost 2,200 stocks; now only few stocks remain. This is mainly due to change in regulation.

No liquidity has come in. In the same breath you should be asking the question whether there ought to be call auction on closing prices in liquid securities.

For me it is an interesting conundrum. All the mutual funds value their NAVs at closing prices. The derivatives are also valued at the day’s closing value.

There have been several issues reported there. To arrive at the right closing price, end-of-day call auction can be used.

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