BSE’s Actions Are In Pursuit Of Increasing Investments In India: Ashishkumar Chauhan
India’s oldest stock exchange, the BSE, is looking at the newer — and greener — pastures now available in the disintermediation of financial products. Ashishkumar Chauhan wants to transform the BSE into a financial aggregator promoting savings and investments. In conversation with Clifford Alvares, the BSE MD and CEO spells out his ideas on how the BSE is attempting to transform itself and the growth of financial disintermediation in India.
Edited excerpts:
Do you think the structure of the BSE derivatives market has to change because volumes are not picking up? Do you think BSE Sensex contract needs to be reduced?
There are arguments in favour of that. But one large issue is the securities transaction tax (STT), which has been a hindrance in shifting liquidity from one exchange to another. STT constitutes 90 per cent of the cost of transactions in India; brokerage or exchange charges are minuscule compared to STT. Hence, people are finding it difficult to move from one exchange to another despite the cost of transactions being far lower in the BSE.
In currencies, we became market leaders because there was no STT. But we have hopes. The INX that we set up at Gift City in January 2017 is now doing well and we are seeing transactions worth $300 million-$400 million.
Our strategy is to win what we can in the domestic area. We will capture market share in the INX and equity derivatives as a product might be better suited in that framework.
Why do you say so?
We are an investment-oriented country, not a speculative-one. Many people lose money in derivatives. We are talking of a minimum criterion to trade in the derivatives market as in Singapore, or a qualification criterion to trade in derivatives.
In equity derivatives, small investors tend to over play; that has prompted Sebi to come out with a consultative paper on participation in the derivatives market.
However, we believe that India requires vast investment to help it become a prosperous nation. Speculation will not necessarily bring about that prosperity.
Hence, we will focus on investments and believe that the BSE is an investment exchange of India.
The BSE StAR MF has a headstart in mutual fund distribution? How will you monetise this platform?
We started BSE StAR MF later than competition. Our technology is better and we keep innovating. That’s made IFAs like our platform. We add a large number of customers every month. I am happy at the speed at which people are joining the StAr MF platform. If you see, in derivatives we have Rs 1,000 crore a day of trades. On each transaction, a broker earns just a little for the higher risks taken.
In MFs, brokers earns a lot more for much lower risk. Customers also take less risk because they are investing in more diversified, more investment-oriented products.
We have 3.75 crore customers on all BSE’s platforms, but almost 50 lakh-60 lakh customers are primarily in MFs.
In fact, today we account for 20 percent of all the funds collected by the mutual-fund sector as at end-December 2017.
We have created new products like daily SIPs, which we recently launched (in January) with HDFC MF, where you can put in Rs 100 a day. That would not have been possible if one doesn’t have automation because the cost of collecting funds from investors is Rs 300-500 per transaction.
We use automation. With a liquid-fund product, from anywhere in India we bring in your money, and putting it in a liquid fund overnight has become the rage.
So, of course there are many innovations. At the behest of MFs, we are coming out with these products, leveraging technology. That’s why people prefer BSE as a platform.
It shows that distributors are willing to pay for the technology, but they are sort of forgoing some of the incentives from the old funds given to compete against such automated distribution systems.
Practically, not many mutual funds pay us. But, of course, we are negotiating to start charging them. We have had some success. People are getting service from the platform. No need to fill forms and go to the nearest office. No mistakes in data entry. When you buy or sell, you get the benefit of today’s NAV. So, it’s a controlled environment.
Another platform, the BSE SME, has been doing well. Is this not a riskier area for small investors?
The BSE was the first exchange to launch an SME platform. There were issues relating to small companies vanishing. However, the government said there was a legitimate reason to fund SMEs, that we cannot stop them from raising funds. In the first three years, market-making is compulsory.
Another issue is that small investors should not be allowed to trade. So, the minimum lot size was kept at Rs 1 lakh. Now, the BSE has more than 220 companies on SME; 40 have already moved to the main board. Market cap has crossed Rs 26,000 crore. The SME platform has raised Rs 1,800 crore. Generally, it has been a good experience. We have tightened regulations for companies that can list.
Do you see the SME sector growing?
It is early days, but India has more than a million companies that potentially require capital. SMEs create more jobs; so there is always the comfort that most of the money raised is actually going to companies, and they will use it to expand and create jobs. I would be surprised if we don’t have 5,000 companies listed in the next few years. Every moment there are 50-60 companies in the pipeline. One of the issues hindering the growth of SME listing is the worry of promoters that their companies will be taken over. But we hope that these 220 pioneers that are now listed will become role models.
How do you see the business model of exchanges evolving? Costs are rising while profit margins are shrinking...
In the last few years, there has been consolidation in stock exchanges. Internationally, the latest reports (2017) say that exchanges the world over did not see any volume growth. You don’t see tremendous growth in traditional areas. Exchanges had become derivative exchanges. In the process, because of automation, algorithms, co-location facilities, trading volumes went up from 5,000 to 25,000 times.
Now, there is some sort of a plateau internationally. That is where we believe the next 25 years will be different. That is why we are merging — to reduce costs and manpower.
India may not have reached a plateau as with other countries. But, in other areas such as distribution of bonds, we have become very large. Last year, we distributed bonds of worth almost $35 billion, which is larger than the net funding to the corporate sector. That came out of nowhere.
Similarly, with MFs, SMEs and government bonds. We are becoming much more of a distribution-oriented company or exchange. That seems to be the future. So, whatever action we take, it is in pursuit of increasing investments in India, whether bond distribution, SME, MFs, etc.
We have entered into a joint venture with Ebix, the world’s largest distributor of insurance products. The BSE has operations in 3,000 cities, with more than 200,000 people. Hence, if you give them more products like SMEs, MFs, or insurance, they will like it. It serves both purposes, and growth will come from these areas.
How do you see the traditional areas of revenue shifting over in next few years?
At present, the listing fees and trading revenue is the largest, almost 60 per cent of overall revenue. In 10 years, if distribution of MFs, bonds and other things start yielding revenue and results, this 60 per cent could come down to 20 per cent. New businesses could take on much larger percentages.
The BSE is a 143 year-old exchange, but we have not gone global. There are other things to worry about. Despite all the automation, we have reached just about 2 per cent of the population. There is very little competition in the country. So, it is better to focus on India. We are primarily an Indian exchange. Therefore, our focus should be on helping India channel savings from investors to companies requiring funds. Going global requires a different perspective, a different cost structure, a different way of competing with global exchanges, against some well-entrenched exchanges in the world.
At the same time, the government wants to create a framework to operate on Indian soil. So, it has created an SEZ, with different taxation. The BSE set up the INX, which competes with Dubai, Singapore and London. In the last one year, it did very well. We are competing with them and exposing our brokers to international competition.
How do you see the future of Indian financial markets?
India can have $10 trillion market cap in the next 10 years. We are now at $2.4 trillion, so that’s growth of four times. In equity mutual funds, we are now close to Rs 6 lakh crore; we could easily grow 10 times here. The transformational changes such as the GST, JanDhan, Aadhaar will increase people’s trust in terms of investing in the country itself. India will require 50 lakh-75 lakh people working as financial intermediaries, from 5 lakh-7 lakh now. With automation, you still require 5-6 times more people in intermediation, both as intermediaries and advisors.
