NSE: CHANGING THE WAY INDIA INVESTS

Do you remember those days of the stock market when members of the stock exchange had to wrestle out among themselves in the well in an open outcry method to clinch the deal of selling just one share? Thanks to the cartelization of brokers, ambiguity in that process was so deep-rooted that the seller of the share always got the lowest price whereas the purchaser would have to pay the highest price. In fact, if it hadn’t been for some interesting and forward looking development taking place in the early 1990s, the state of the Indian bourses would have been the same with decades’ old systems and process acutely prone to scams and manipulations and siphoning off the hard-earned money of investors and hurting investment sentiments.

Actually it was due to the infamous ‘securities scam’ triggered by notorious ‘Big Bull’ Harhsad Mehta that the whole paradigm of share trading and investment in the country went through a change. After the biggest securities scam of its kind in the early 90s the Indian stock markets were left licking their wounds and nobody was quite sure about the future of share trading in India. At that time, with Government of India’s backing, a consortium of IDBI, one of the biggest financial institutions and several other financial institutions, promoted an altogether new exchange called the National Stock Exchange (NSE) as a tax-paying company in November 1992. The then executive director of IDBI (after that MD and CEO of NSE) Dr. R H Patil had a mission in his mind. It was to give India a “market” which would be transparent and provide easy access to trading to all investors. In fact NSE was an evolution of a high-powered study group’s report to attain this objective.

An Amazing Success Story

In April 1993 it was recognised as a stock exchange under the Securities Contracts (Regulation) Act, 1956. It commenced operations in the wholesale debt market (WDM) segment in June 1994 while the capital market (equities) segment was started in November 1994. Interestingly, despite a very sober and silent start, it surpassed the BSE in terms of turnover and today it controls more than 80 per cent of the total turnover of the share markets. The derivatives’ segment of NSE started in June 2000. One interesting fact is that the NSE didn’t have its own office and commenced operations from a floor of Mahindra Towers in Central Mumbai.

NSE, in that sense, changed the overall outlook of the share markets in the country. Only after two years of its inception, NSE started online trading which altogether changed the definition and style of trading.

The model which NSE gave to the nation was well-honoured by the SEBI and it forced equity market reforms in the country that other exchanges, including the BSE, had to follow. It is quite true that it was the competition and pressure which NSE had put on BSE that forced the latter to change its stance and ultimately start a transparent system of online trading. Importantly, the state-of-the-art technology network that was established by NSE has given it ample experience, so much so that it has been approached by many other countries to establish such infrastructure for them.
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Today NSE is one of the leading exchanges in the world on several key parameters. Due to its robust technological backbone, trillions of trades become possible simultaneously in a flawless manner. NSE now ranks among the top three exchanges, as per a WFE rankings done for the period Jan-Dec 2013, at the global level for stock futures and index futures and options. In fact it ranked No. 1 as far as the index option is concerned as on March 2015. Due to a de-mutualised structure, its ownership is very much different from its management. At present NSE’s footprints spread across more than 2,000 cities with around 2,500 VSATs and 3,000 leased lines. The market capitalisation at NSE is Rs 9,930,122 crore as on March 31, 2015, making it the 12th largest exchange in terms of market capitalization. By way of turnover it has clocked a total trade turnover of Rs 6,41,53,943 crore during FY15, including capital market, equity futures and options, wholesale debt market and currency future, etc. The number of companies traded on NSE as on March 31, 2015 are 1,603. During FY15 NSE has touched a total turnover of a whopping Rs 5,56,06,453 crore in the future and option segment, with an average daily turnover of Rs 2,28,833 crore. This includes index futures, stock futures, index options and stock options.

Roping in the Middle-Class

Though India seems to be financially vibrant, it is an irony that just around 1.5 per cent of the population holds equity. On the other hand, countries like the US have around 18 per cent equity exposure followed by China with 10 per cent. In such a situation, NSE has a mission in hand to anyhow increase the investment appetite of the Indian public for stocks. After achieving various milestones in the last 25 odd years, NSE’s mission is to let the common man of the country also enjoy the fruits of India’s growth story.

To do so, the NSE has coined various retail investor-centric products like ETFs, CPSE ETF, Nifty ETF, Bank ETF, etc. and has consciously been spreading awareness about these products among the masses. “It’s always been our goal to channelize domestic savings into more productive uses for the country. For the convenience of retail investors, structured products like ETF will remain our focus. Already we are witnessing a spurt in general interest,” marks Ms. Krishna Ramakrishna MD & CEO, NSE. The NSE is also aggressively working on spreading awareness among the middle-class for investment avenues like mutual funds, ETS, equities etc.

‘The Challenge is to Sustain Transparency and Trust’

The NSE always claims to have the highest degree of risk management and transparency, and the credibility it has generated across the globe is unparalleled. NSE’s technological platform is quite robust and the institution is forward looking in its approach with the implementation of various risk management tools proactively before anybody else does so across the globe. Also, its trading framework is one example which was implemented way back. Despite this, stock market operation remains a live wire event and vulnerable to various manipulations.

Recently some allegations have been reported in the media about the NSE providing faster access to some selected brokers, thereby putting investors at a loss. So sensitive towards its credibility and quest for transparency the NSE is that it wasted no time in filing a Rs 100 crore defamation case against the concerned organisations for the alleged misleading report. “The exchange has sought withdrawal of those reports, etc. as well as has made a claim of Rs 100 crore (which can be revised upwards). These reports referred to trading mechanisms, etc.,” the Exchange said in a statement. 

“As is known, since inception the NSE has been maintaining a high degree of surveillance and integrity in its day-to-day operations and strictly adheres to the rules, regulations and guidelines issued by the regulators from time to time,” the statement adds. When DSIJ inquired about this episode, NSE sources said that the matter is sub judice, but assured us that the systems of the NSE are quite robust and transparent and adhere to the highest degree of globally relevant risk management norms to safeguard the interests of investors at large.

Importantly, in June this year the RBI has come out with some kind of a flag regarding the volumes that are there in algorithmic (algo) trades and pointed towards “systematic risks” for the same. The RBI in its financial stability report said that “volumes in algo trading and high frequency trading increased substantially in the cash segment of the equity market to about 40 per cent of the total trades in both the exchanges in March 2015.” Systematic risk means risk of total collapse of the financial system due to widespread default by financial entities as had happened in 2008. Sources in the NSE said that its system is quite strong to face any challenge of the financial markets’ risk and the RBI’s report has nothing to do with NSE risk management, which it will prove in court. 
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“NSE HAS ONE OF THE BEST RISK MANAGEMENT SYSTEMS IN PLACE” 

An interview with Ms. Chitra Ramakrishna, MD & CEO, NSE

CNX Nifty has already completed 20 years while Nifty Futures has recently completed 15 years. Can you take us through the transformation of NSE through these years?

NSE has been the first mover in many areas. So, in a way there are too many milestones that the exchange has achieved since its recognition as a stock exchange in April 1993. Nifty, launched in April 1996, has become the benchmark index of the nation. Then gradually other indices, options were introduced. Alongside, we also set up NSECCL, NSEIT, etc. for providing peripheral services. In 2002 we started the ETF products. ETF is a very promising segment as it is being proved now and is ensuing large-scale financial inclusions. During the end of last decade we launched a few new products like currency, interest rate futures, etc. All these are credible efforts in their own rights and have ultimately transformed the Indian capital market.

What role has technology played in shaping NSE’s makeover over the years?

We started as an online platform. So obviously technology played a key role. From V-Sat to fibre optic cables, the change happened with time. Though the change has already been very substantial, due to the ever-changing technology we are gearing up for adding new services. For example, as trading habits are changing, lots of people are preferring web and mobile solutions. For such new generation of investors we are adding new features.

Do you think that technology will be more helpful and assist institutional investors through automated trading (algo trading) or high-frequency trading (HFT) than to retail investors, and how do you see this challenge?

Globally, trading patterns and business models have changed over time. In fact since our first year to this year, if you see, it has changed several times. In India also it changed from floor to automated trading and satellite-based trading to leased lines, etc. Today at many places algorithms are doing what human beings were doing earlier - this change is perhaps inevitable, like in our day-to-day lives where many things have become automated. Each of this has contributed in some way to the overall liquidity and cost in the market, among others. None of these changes were hardly in conflict with each other and among different set of investors / traders. The market can accommodate all.

Risk management plays an important role in mitigating any flash crash or other untoward activities. What are the steps taken by NSE to strengthen its risk management system?

Risk management is a lively process. It changes as per trading norms, SEBI guidelines, etc. NSE has one of the best risk management systems in place. In fact, risk management in India is very proactive. For example, we had an algo trading framework in place before many countries implemented them.

What is the role being played by the products and innovations in attracting new investors and how is the NSE contributing in this respect?

Product innovation is the key. In the past few years we have seen many new products successfully making their debut on the NSE. The exchange has always incorporated market feedback while designing products. At the same time we have kept in mind the regulatory framework. As of today, many such ideas are work in progress while a few others are awaiting SEBI’s nod.
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ETFs has played an important role in the developed market in spreading equity culture; what is your experience in India and how do you see it going forward?

Today we are billion dollar-plus in ETF AUM and that’s a very significant number compared to where we were a year ago or two years ago. Mutual funds, ETFs…these really are the broad-based passive and active investment vehicles into which a saver can put his money. It’s also a small ticket product and an investor doesn’t have to monitor what he/she is doing. In fact this is the reason ETFs have really taken off in a big way in many other countries and our passion for ETFs is 10 years old. In the last 15-18 months we have really seen a lot of interest. So today CPSE ETF, Nifty ETF, Bank ETF are all getting good retail interest. There is another very interesting fact: Even in 2011 and 2012 when we all were really worried about retail investors going away from the market, we were consciously at work to open new SIP ETF accounts along with some of the large retail brokers and that really played out very well. This kind of product with the SIP construct may be the right sort of vehicle for an investor to come into the market because it creates a saving habit.

Nifty for many is proxy to Indian investment; what are the steps you are taking to make it more accepted and popular overseas? 

Nifty in the last 15 years started first as a barometer of the local market. It has really taken off and found acceptability with the market participants and today truly it is a proxy for the Indian asset class and Indian investment. We also have ETFs structured on Nifty. So we think that the 15-year journey has helped us entrench Nifty as a proxy for investment in India. In fact we are present in 32 destinations already. The exchange has also firmed up its reach in the Asian geographies. Gradually it’s not only Nifty but other researched products from the exchange which have also become popular globally. Today the Nifty family has around 40 indices.

The equity market is fairly well-developed in India but the bond market is yet to achieve the maturity required. What is the NSE doing to develop the bond market and what are the main obstacles?

The bond market too has started doing very well of late. The interest rate futures have taken off nicely. Liquidity has come in different bonds that are traded today. With different tenure bonds now making a beginning the market is becoming very wide. In fact while we talk two new IRF products have started at the NSE today. The bond market has its own challenges as the products have different features than conventional ones. It may be a while before it becomes more popular. As an exchange we have conducted around 1,000 awareness programmes in the last financial year to cover such products.

What is the role, you believe, is being played by the stock exchange towards the growth of an economy, especially channelizing savings into investment?

Like most people in the market we also believe that the amount of savings that comes into the market is still very small. So it’s always been our goal to channelize the domestic savings into more productive uses for the country. On the other side, improving financial well-being, creating a sustainable lifestyle, etc. are also important. For convenience of retail investors, structured products like ETF will remain our focus. These products are well-researched and have traditionally given decent returns. Already we are witnessing a spurt in general interest. Besides, with EPFO investments coming into the market, huge savings can get unlocked into productive activity very soon. All these activities are shaping up nicely and we believe that such things are stepping stones that can take investment activities to the desired level.

What is your experience with the SME platform and how is it helpful to both investors and promoters?

The segment is new and is picking up. For the last two years NSE is assisting many companies to raise capital using NSE Emerge (SME) platform. For investors it is an opportunity to pick companies at an early stage of their lifecycle. This initiative is actually in line with the ‘Make in India’ theme. The SMEs are our hope for tomorrow. With the capital raised through the exchange, hopefully they will grow to become mass supplier of products and services from India soon. At the same time, NSE ensures that proper diligence is applied in the listing process and subsequently.

Can we see NSE being listed and if yes by what time?

We are considering it. The board and the management will take it to a logical conclusion whenever it will be put in place. But we can’t say when as there are certain issues.