At a recent meeting with the public interest directors (PIDs) of key stock market infrastructure companies like depository participants (that handle share demat accounts) and exchanges, the incumbent Securities and Exchange Board of India (Sebi) chief Madhabi Puri Buch sought their opinion on the merger of clearing corporations that settle daily trades in India's market, sources told Businessworld. The National Stock Exchange (NSE) and the BSE are two of India's largest stock exchanges and each have their own clearing corporations - NSE Clearing Ltd (NCL) and BSE's Indian Clearing Corporation (ICCL). Between the two NCL handles 90 percent of the trade settlement worth hundreds of billions and ICCL does approximately the rest since volumes on the BSE are low.
As of now, the risk between the two is divided since if one goes down due to tech glitch or any other reason, there is always the other that can handle the trades and clearing. In a way if the clearing corporations merge then it would simply mean the merger of the stock exchange as well as a single margin would be required to trade either on the NSE and the BSE and the trades that are punched could go on any of the exchanges. This would clearly mean advantage BSE at the cost of NSE, since the former exchange has been lagging behind for over three decades now. In the past, BSE to overcome competition from NSE had advocated for a merger when Madhu Kannan was at the helm but SEBI never agreed to the idea for the simple reason of encouraging competition.
Already, there is interoperability between the clearing corporations of the two exchanges as per which trades executed on NSE or BSE can be settled at either of the two clearing corporations -- NCL or ICCL.
Advantage BSE While NSE Valuations Will Take A Beating?
Currently, the BSE could have issues with NSE's clearing corporation. This largely as settlement is concentrated at NCL due to most of the options volume settling there due to which BSE has to pay its rival clearing corporation. The charges paid by NSE to NCL come back as revenue in the consolidated financials. However, BSE is required to pay both NCL and ICCL for settlement and clearing charges. On a standalone basis, BSE incurred a cost of Rs 63.8 crore towards clearing and settlement charges in December 2023 quarter, up from Rs 40.2 crore in the preceding quarter. This may be a key reason why SEBI wants a merger of the two clearing corporations to support BSE, analysts said. BSE in the past has requested NSL to reduce charges.
Experts say there is no other rationale as to why anybody may want a merger of the two clearing corporations, since traditionally India has always gone for a back up and competition strategy, which is two exchanges, two clearing houses and two depositories. Moreover, if the clearing corporations are merged then why would exchanges and depositories remain standalone, ask experts. Also, the merger may not be an easy task as such a move will have to clear the Competition Commission of India (CCI).
Merger Raises Several Questions
In case India moves to a single clearing corporation, then who will own it and who will invest in it? As of now, both the exchanges are 100 percent owners of their respective Clearing Corporations. In case, SEBI says NSE and BSE own 50 percent each then that leaves out MCX and straight away kills Metropolitan Stock Exchange and leaves scope for no other exchange to ever come up again in India -- all this just so that the BSE can earn profits and its share price move up?
Clearing corporations are dependent on the parent exchange for business and funds. Their entire capital is at risk in case of broker default. Their model doesn’t earn much profit. Which bank will invest in them? Should brokers be allowed to invest in clearing corporations? If it is not high risk, will the same argument for merger be true for a single stock exchange and single depository? These are some of the questions and more that will have to be answered before a merger of India's two clearing corporations is allowed, experts said.
