Surging All The Way
The BSE’S MD & CEO, Ashishkumar Chauhan is busy. As he has been for the past nine years. He has taken on the challenge, and is continuing doing so, of revitalising India’s 143-year old Bombay Stock Exchange. He has had an uphill task. Newer exchanges with new systems and a range of offerings, both old and new, became more attractive to more people. Besides, the BSE had been plagued with controversy when Chauhan took over. It was an arduous task, but Chauhan took on the challenge.
To top it, the exchange sported archaic software systems, sorely requiring a revamp. All the while, rival exchanges were capturing market share. BSE was slow to make new members. In the process, the exchange lost precious market share in equities and transactions. BSE is still trying to recover lost ground in the cash and derivatives market of the business.
Chauhan quickly got into the repair and re-constitute groove. He slashed membership deposit rates from Rs 1 crore to Rs 10 lakh, allowing more admittance from outside the business centre that is Mumbai. He increased the number of members from 650-odd to 1,400+ now. Over the years, Chauhan introduce new segments and platforms such as SME, MFs, and bond distribution.
Building The Exchange
It was an uphill climb for Chauhan as technology revamp was a priority, and he quickly bought it up to speed. The BSE secured a partner in Deutsche Borse, adopted its open source technology systems and rehauled the technology systems of the exchange. “We also changed our clearing settlement, network management, broker software, and every other software without users realising it,” says Chauhan. “The trick was to do it in a way that people didn’t even realise that the technology had been altered,” he adds. 
A problem with the exchange was its regulatory reputation. Because the business was broker-run and -operated, people did not easily trust the exchange. “We had to work much harder than modern exchanges. That took us some time, and with some really strategic decisions at the Board level,” says Chauhan. “It was important to project oneself, that there were no brokers on the Board as with other exchanges in the country,” he adds. It’s this professionalisation of the BSE that led to its change in the perception in the market place.
Birth of the New Businesses
Much had yet to be fixed, though. There were about 5-6 old businesses, which included secondary market trading, equity derivatives, currency futures, interest-rate funds, equity listings and IPOs. The BSE had lost out on many of them.
In some new businesses such as SME, bond listings and mutual fund distribution, the BSE has gained back some of its lost mojo. In the listings space, it has 5,616 companies which brings in precious revenue; other exchanges might have 1,700 or so. The BSE harvests more IPO monies than any other exchange in India.
Some new businesses such as SME, bond and mutual-fund distribution, the BSE has captured a larger market. It enjoys an over 70 per cent marketshare in mutual-fund distribution through exchanges. It covers 75-80 per cent of the SME market, and 65-70 per cent of bond distribution.
Chauhan reckons that the newer business may not be as exciting as trading in equity, but the fact is that the newer businesses have set the exchange on the path to the stars. “The newer businesses have given us better results, and they are becoming large in their own right,” says Chauhan.
SMEs Rule The Roost
In recent times, business has been roaring on the BSE’s SME-listing platform. The exchange was the first to start an SME-listing platform and, in a little less than a decade, this platform cornered a 66 per cent share of SME listings. At last count, 224 companies listed on the BSE SME platform, raising Rs 1,863.46 crore from the market. Total market capitalisation in this segment has crossed Rs 22,085 crore.
In fact, scores of SMEs in various industries from consulting to ice cream factories to surveyors have successfully raised money and listed their businesses in the SME arena. Companies that scale up can migrate to the main BSE platform. Over the last several years, 40 SMEs have done so.
In India, several hundred thousand listed SME companies are looking for capital to grow and Chauhan expects that over the next few years a few thousand SMEs are likely to be listed. “SMEs create more jobs, and so there is always the comfort that most of the money raised is actually going to them, and that they will use it to expand and create jobs, This, effectually helps many small companies to grow. At any time, over 50-60 companies are in the pipeline. I would be surprised if we don’t have 5,000 companies listed in the next few years.”
To Town With MFs
In the business of mutual fund distribution, the BSE seems to have served an ace. In a little less than a decade, distributors and independent financial advisors have been turning to BSE StAR MF to sell mutual fund products. This platform has over 1,800 schemes listed, providing daily net-asset values. What distributors find convenient is that they can quickly log in for all their client activities and provide quick access to funds at very low costs.
In mutual fund distribution in the offline world, logistics and transaction costs can be significantly high. Besides, sometimes processing errors occur. The BSE StAR MF platform does away with all that, permitting distributors to provide quick access online to service their clients.
In the first nine months of FY17, this platform accounted for over Rs 1 crore transaction orders, and passed on nearly Rs 75,000 crore to the fund industry. It now accounts for 20 per cent of all the funds collected by the mutual-fund sector. Also, the platform has introduced features such as the daily SIP. “The nearest other platform will be one-tenth our size,” says Chauhan.
Also, the BSE has made a mark for itself in raising corporate bonds. Its electronic bond platform has been instrumental in raising Rs 3.5 trillion through the bond route from July 2016 to December 2017. In the third quarter, the BSE raised Rs 43,679 crore through bonds, effectively capturing more than a 56 per cent market share in this space.
Still, the business of exchanges globally has reached a plateau as trading volumes have softened. Besides, newer source of revenue seem to be contracting. In the last few years, the process of automation such as algo-trading has driven volumes higher, but that is now plateauing. Chauhan, however, believes that India may not have reached the plateau level that other countries have.
He reckons that stock exchanges have to provide people access to channel their savings. Investment distribution, therefore, is likely to account for the bulk of an exchange’s revenues. “In the next 10 years, if the distribution of MFs, bonds and other things starts to yield results, trading revenues could come down from 60 to 20 percent. We have just reached 2 per cent of the population in financial savings. So there is a vast canvas for India to paint itself on,” says Chauhan. He has, of course, led the BSE to a successful IPO. Now, the BSE stock is worth Rs 4,445 crore, while consolidated revenues were up 32 per cent to Rs 340 crore for the nine months ending December 2017.
Profitability can get better over the coming years. The BSE has its pulse on costs and has kept costs low, especially when it looks for expansion in newer segments. For instance, it set up the new India International Exchange in Gift City at Gandhinagar at a cost of Rs 30 crore, of which Rs 15 crore went toward premises.
More Players on the Turf
New competition in the exchange business could find the going tough. Globally, just one or two exchanges are dominant in any country or region. Further, new segments like the bond market will add to the revenue kicker going forward, and that bodes well for well-entrenched exchanges like BSE. “I doubt whether any other exchange will displace the two exchanges. There will be a healthy competition between NSE and BSE,” says Amar Ambani, head of research, IIFL Wealth Management. “There could be some areas that BSE launches and NSE will follow or vice versa. But a third and fourth player will not be able to disturb their position in traditional products. In fact, when this bond segment takes off gradually, it is going to be a big revenue and turnover kicker for the exchanges,” adds Ambani.
So, for BSE, the show is only just beginning as investment related products are expected to provide a decent revenue kicker in the long run. Chauhan has ensured that the BSE keeps its competitive advantage – and operating costs lower. And just as the business of exchanges and trading has evolved over the last 143 years, the BSE will continue to evolve — one product at a time.
