We Are Here To Help The Industry

BSE is a 140-year-old organization. What steps did you take to transform it into a nimble, responsive, and customer-focused organization?

Yes, BSE is a 140-year-old organization. For the first 120 years of its existence, it had floor-based trading. Only in 1995 did it start adopting technology and migrated to screen-based trading. We believe that in the 21^st century the competitive advantage comes as much from people, distribution, products and technology. We took steps to address each of these issues.

Let us start with people. BSE did not have an image to attract top-notch people. What strategy did you deploy to achieve this objective?

It truly was a problem attracting good talent to the BSE. Take the case of the CEO. In the last 20 years, no CEO is recorded to have lasted for more than three years. We had to start by creating trust among the potential people we wanted to attract and assure them stability and the right professional ambience. More importantly, we wanted to convey to them that at BSE we work as a team and not as individuals. To do so, we had to create a culture where people with bright ideas and execution capabilities were not only welcome but had complete autonomy and responsibility regarding their functional areas.

We also wished to convey to potential talent that when they make a career at BSE they get an opportunity to serve the country. When people became aware of these aspects, they showed an inclination to serve with the BSE. They in turn invited other like-minded people to join the organization. This process took time but today we have talent from top MNCs such as Deloitte, Nomura, Morgan Stanley and HSBC, among others. And our roster also includes people from the non-finance sectors, including IIT and IIM graduates.

The next challenge we faced was distribution. BSE was regarded as being focused on Mumbai and rightly so considering that almost all the brokers were from Mumbai. This was the situation until 2009-10. However, in today’s world you cannot have a business that is physically confined to one particular place. To flourish it should attract participation from every corner of India and the world. Therefore, we had to improve our distribution to ensure that outsiders were also able to become members. We wanted our products to be distributed throughout the country. We took a strategic decision to reduce our refundable deposit from Rs 1 crore to Rs 10 lakh. This move got us around 700-800 new members. Today, BSE has a membership spread that is comparable to any other stock exchange in India.
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The next issue was products. For almost 135 years of its existence, BSE was primarily a single product exchange. It worked only on stock transactions, not in currencies, derivatives, interest rates or mutual funds. It was imperative for us to expand our product range because regulators were allowing new products to be introduced and the market too was willing experiment with different offerings. We therefore created a bigger portfolio of products.

The next issue that caught our attention was technology. The obsolescence rate of technology is very fast. Therefore, we had to benchmark ourselves with the best in the world – we have potential customers in Singapore, Hong Kong, America and Dubai who desire to trade in India. To make it attractive for them to come to the BSE, we had to have the best in technology. 

In around 2010, BSE was having a response of around 200 milliseconds and a capacity of 5,000 responses per second. We then worked hard from 2010 to 2012 to make it 10 milliseconds. However, by then the world had moved to 100 microseconds; again, they were 100 times faster. Then we realized that it could not be a permanent ‘catch up’ game. Therefore, we tied up with Deutsche Borse AG, which has a small stake in BSE, and procured an open source technology platform. Although the technology is high-end, the cost to us is extremely competitive. This helped us ensure increase in speed while the total cost of transactions decreased substantially when spread across all the stakeholders.

Today, we have a response of around 200 microseconds and a capacity of around 5 lakh orders per second. Therefore, we have gone up 100x in the capacity area and we have gone up from 300 milliseconds to 200 microseconds that is 1,500 times faster in just about five years. From October 2015, our attempt is to provide a response time of about 30 microseconds, which is 10 times faster - in 1 second there are 10 lakh microseconds.
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What other steps were taken to make BSE competitive and relevant?

We had to take a leadership role for which we worked on two strategies. The first strategy comprised developing the Blue Ocean product portfolio by identifying uncontested space in the market that would offer either none or negligible competition. The first Blue Ocean product was mutual funds, which was distributed through the exchanges. Now we have all the mutual funds on our BSE platform, and in fact are the biggest in this space with 90 per cent market share.

The second Blue Ocean product was called Overnight Liquid Fund Framework. Most business people and individuals have money lying in savings or current account in the bank and are not able to earn much interest on these amounts. This product helps corporates and individuals invest surplus money that is not required for that particular day or a certain period. Further, we started mobile trading. With this investment product, people equipped with smartphones can transfer any funds lying unutilized in their savings or current account at 1 pm into this fund. Next day, at 10 am, they will get the principal along with the applicable interest transferred back into their account. In this manner, capital does not go waste but earns interest.

The third Blue Ocean product we created focused on the SME market. SMEs are very important to the country’s economy because they create jobs. The ‘Make in India’ and ‘Skill Development Programme’ launched by the government are likely to get impetus through actions taken by the SMEs. Therefore, it is not surprising that the government is very keen to support SMEs. The government instructed us to start the SME platform. This was a positive move considering that for over 20 years, since 1993-94, small companies were denied entry to the stock exchange platform. Now, the BSE commands a 95 per cent market share in the SME space. We have around 109 listed companies with another 30-31 in the pipeline. I am confident that some of these SMEs will go on to become large-cap companies.

In our legacy business, we continue to do well. Take the example of IPOs. BSE traditionally has been excellent at it and 90 per cent of all the IPOs issued in the last five years have been through the BSE.

Consider the currency market. We entered this space at the end of 2013 end, eight years behind the two market leaders who commanded an equal share. However, in less than 18 months we can claim a market share of 35-40 per cent.

The image of the BSE being broker-friendly can be traced to the way it was set up by brokers 140 years back. They were an integral part of the exchange and until 2007 they owned and operated it as an association of persons. Even as late as 2010, brokers were on the Board of Directors. Even from 2007 to 2012, one-fourth of the Board was made up of brokers i.e. three out of 12. However, today BSE has no broker on the Board.

I can proudly say that BSE has some of the most eminent people on its Board. Its non-executive chairperson is Mr S Ramadorai. We also have Mr S H Kapadia and Dr K Kasturirangan who is an MIT professor, as well as Dr Sriprakash Kothari and LIC’s managing director, Ms Usha Sangwan. Then we have three retired secretaries on the Board too. They are Dr Sanjiv Misra, Mr Sudhakar Rao who used to be the chief secretary of Karnataka and Mr Dhirendra Swarup who retired as secretary to the Government of India, Ministry of Finance. There is no Board in India today with such eminent personalities. They bring their experience and knowledge to the functioning of the BSE and make sure that we comply with all the processes, rules and regulations, not just in letter but in spirit too. When there is a choice between being compliant versus being business-oriented, compliance takes priority, always and without exception.

Yes indeed, we did. BSE came up with a new logo and a new tagline, ‘Experience the New’. Through our tagline, we are saying we are ‘old’ but completely ‘new’and that you will be surprised with your experience when you come to the BSE.

You have rightly mentioned that BSE has an eminent Board of Directors who favour compliance over business. However, as per the statistics, there are many ‘vanishing’ companies out of the almost 5,400 listed companies. They used your platform to raise money from investors and then disappeared.

There were many companies during the Nineties that raised money from investors out of which some genuinely failed while others misused the funds. However, it is difficult for us to identify beforehand about the intentions behind raising capital from investors.
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There certainly are some indicators. For example, such companies stop compliance activities such as not filing quarterly results, not disclosing shareholding patterns, refusing to submit balance-sheets, etc. Such companies are easy to identify. Now of course there are clear-cut regulations. Once such companies are identified, we give them a warning and if they do not pay heed, we suspend them.

Out of the 5,400 listed companies, around 1,200 companies have been suspended. Of these, around 1,000 companies have been served a seven-year suspension order. Once SEBI approves, we will release these 1,000 companies. Therefore, there will be 4,400 listed companies out of which we will suspend another 200 companies. Suspension is a strategy we deploy to weed out non-compliant companies that may eventually do the vanishing act.

We have also created a bulletin board system where such companies’ descriptions are put up and no transactions are allowed on the exchange platform for such companies.

Let me share with you an example of how some companies beat the current system to mislead investors and the steps we are taking to ensure that they do not succeed in their nefarious intentions. Companies, whose stock prices are in the range of Rs 2 or Rs 5, with no fundamentals, gradually start climbing up and reach a very high price, say Rs 2,000, over a period of 2 – 3 years and then return to Rs 2 or Rs 5. In the process, they dupe gullible investors. The current system cannot spot such mischievous companies because SEBI monitors daily price bands - 2, 5, 10, and 20 per cent. Therefore, if everyday the price of a share goes up by 5 per cent, the system will not be able to spot it.

In addition, if a stock price goes up by 5 per cent every day over a 1-2 year period, it can go very high without anybody noticing it. Therefore, from October 1, 2015 we have started implementing a proactive strategy called Price Band. We will not only have daily price bands but exclusive BSE companies will have weekly, monthly, quarterly and yearly price bands so that companies whose prices go from Rs 2 to Rs 2,000 and then swing down in a short period become visible. This is one of the farsighted decisions the Board has taken.

The BSE is also in the process of implementing an exclusive stock segment so that traders are aware that these companies are exclusive to the BSE.

Today it is not easy to indulge in insider trading activity in the classical sense of how insider trading is understood. Given the technical architecture which the BSE and SEBI have implemented, there is a lot of information available with us that indicates who has traded while leaving a track left. You would have heard of SEBI issuing show cause notices to large corporate houses. This will reinforce my claim that there is reasonably a large amount of information available with regulators today to catch the culprits.

Take India, for example. Although it is ranked at 142 in terms of ease of doing business, it is ranked seventh in the world for protecting minority interest rights. India is ahead of the US in this ranking, and for that, we have to give wholesome credit to SEBI for protecting the minority shareholders’ rights. In addition, seeing how efficient and effective SEBI is, it is no wonder that the government is also providing more power to SEBI to regulate various schemes, including chit funds.
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It is a fact that a majority of our income comes form non-core activity. For the last 20 years BSE didn’t improve its revenue stream, and gradually it started becoming dependent on the investment income from its own funds. Because of this, earlier we had operating losses but a positive net profit, which was due to investment income from the old funds.

BSE has a strong balance-sheet but it has to learn to earn its income from core activities. Over the last 20 years, our costs have gone up but the revenue has not gone up commensurately. The result is that our dependence on non-core income has grown. The Board has realized this issue. Therefore, in the last 5-6 years we have worked hard to upgrade it to a level where today we are positive about operating at a profitable level. However, it is a slow and gradual process.

As mentioned, we already have a slew of Blue Ocean products, which will generate income for us. In addition, we are betting on what I call non–linear pay-off businesses. In a linear pay-off business you put in ‘x’ and you get a return of ‘2x’. In a non-linear pay-off, you put in ‘0.1x’ but you get ‘100x’ if you are successful.

Let me explain. You put in only ‘0.1x’, which means you don’t put in too much money into your new products or activities. The idea is to control your costs and keep them low. Consider technology: it is the heart of a stock exchange. Therefore, changing technology of a stock exchange is like changing the heart of a running person without his knowledge. At BSE we had a choice – either spend Rs 700 crore over five years or spend Rs 16 crore. We decided to bet on Rs 16 crore and we succeeded. Therefore, even if we had failed, the risk factor was low.

Another example is that of the mutual funds’ business. For BSE it did not cost too much because it is riding on our other business and therefore is organic growth. The investment required was not very high.

Other than focusing on developing our non-liner business piggybacking on the existing infrastructure, we are also focusing on non-physical business. These are conceptual businesses. Google can grow a million times in merely 15 years of its existence because it is a conceptual business. Imagine if it was in a physical business, say of manufacturing mugs. Then it could not have grown so steeply and effortlessly. Similarly, BSE too believes it is in the non-physical and conceptual business that can provide scope to scale up effortlessly.

Yes, the NSE has done well. One of the reasons could be its range of product offerings. Take the derivatives market. It is ten times that of the equity market or more. Many people trade in the derivatives market, which the BSE did not have for almost 10 years. 

Let me answer this by sharing an analogy with you. If you run a grocery store and a supermarket comes up next door, people will get to buy more things there and that too with discounts. That would draw people to it.

We do not propose to go in for an IPO. We are not trying to raise money. We are going in for ‘offer for sale’. It is to give our existing shareholders an opportunity to exit. These shares will be offered to new shareholders.

We are a utility business and have a steady income business. We are also a reasonably profitable business entity and are confident that we will continue to give consistently good profits in the long run. Therefore, if some portion of the profit is deployed towards Settlement Guarantee Funds and Investor Protection Fund, both these funds will actually strengthen and help us in our business.

Normal companies, when they invest in plant and machinery, get depreciation benefits, which acts a tax shield. The money accumulated by companies by way of depreciation is used to replace the plant and machinery and other fixed assets when their useful life is over. Now take the case of the funds mentioned in the earlier reply. When we invest in Settlement Guarantee Funds, any default in the market is settled through it. These funds protect the BSE.

Any company that lists has to become more transparent. It would bring additional transparency to the BSE’s workings.

We have applied to SEBI and they have to take the call.

Most countries have listed exchanges and that has improved their functioning because of greater scrutiny and questions raised by the shareholders.

We are here to get capital for the industry when they want it. And if we are not efficient in performing our duties and other methods, financial instruments or platforms are better and more efficient, it is quite possible that business will move over to them whether we like it or not. A few years back the Government of India allowed companies to directly enlist on foreign exchanges. When that happened, many people incited me by saying that that in the earlier regulation, Indian companies had to first list on Indian exchanges and could only then go abroad, to which my response was that if we are not able to raise funds for our industry and if the other markets are able to raise funds at the valuation companies feel they deserve, then good luck to them. They should be able to go out and raise capital. Else, we are stopping the industry from growing while trying to save the stock exchange. I strongly believe that stock exchanges cannot become gatekeepers and collect toll. BSE does not believe in monopolistic ideas. We are here to help the industry.

For listing on the BSE, a company must have a track record of profitability. Many of the companies you mentioned do not meet these criteria. SEBI has now come up with a regulation, which allows companies with no-profit track record to get listed by using a new method. I am therefore sure that at some point in the future these companies will raise funds through the BSE.

Money markets as a concept have always been treated with suspicion. Moreover, the reason for the mistrust is not hard to find. The market is marked to the market and hence there is volatility every second. People are not comfortable with changing prices. It is not something that many can digest. Middle-class people form the backbone of the investing community. For them, an increase in prices is welcome but it causes pain when prices decrease. Take, for example, the prices of petrol and diesel. They keep changing but shock people each time it happens. On the exchange, there is a daily change in your wealth. Your entire net worth changes in seconds. The volatility that is inherent in the market leaves many people disheartened. The challenge is how do create a framework that people will trust their money with. This is especially required to attract potential investors.
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Any economy has two legs: the banking system and the capital market system. Take the banking system in India. It is facing its own challenges in terms of trust and, as mentioned above, even the market system is facing a similar challenge. The banking system was trusted for long but now it is not so because they have too many skeletons hidden inside. So, how do you create a framework of trust? We can only do so by offering risk-free investment products to people, which I will elaborated upon later.

The second challenge we face is about creating a distribution system through which we can reach out to everyone and get them finically involved in borrowing and saving transactions. Today technology and automation can come to our rescue. Through mobile phones we can reach a greater number of people and through automation we can bring down the cost of transactions. The third challenge is creating appropriate products for India. One such product can be the government bond, which is considered as a product for institutional markets. For me, it is a retail product because it provides a framework of trust to the exchange. Another product could be the Overnight Liquid Fund Framework, which I have discussed earlier. The third product is not so much a product but a framework for providing all financial instruments on the same platform.

FIIs want a complete suite of products on a platform before they get attracted to it. Now that we have a diversified portfolio of products – equity derivatives, interest rate derivatives, mutual fund products, and products to cover the debt segment, we are able to attract investors on to our platform. Once they start experiencing our services, technology and products, migration will become easier. The bottomline is to create the right environment.

India’s saving rate is 30 per cent of GDP and it is growing at 7 per cent. The size of our GDP was USD 2.1 trillion last year and we will at about USD 2.3 trillion this year. At 30 per cent savings, this translates to about USD 700 billion. That much money is being invested into gold, silver and real estate. If you consider the last five years, we have bought more gold on a net basis than FI investments.

Actually, we are net exporters of capital, not importers of capital. Moreover, what are we using that capital for? Nothing! Not all this is being transformed into productive capital and the onus is on the financial system to make sure it is invested in proper channels. In some sense, all of us have to stand up and be counted to ensure this transformation happens. If we have to create 1.5 crore jobs in the next 20 years i.e. 30 crore jobs, it cannot come out of investments in gold and silver. It has to come out of investments in productive assets.

The first thing we have to do is to create trust among investors. This we can achieve by offering risk-free products.

Government bonds are risk-free. I have taken up this issue with the RBI, reasoning that by offering these bonds, the smallest investors would rather park funds here instead of opting for chit funds. Post that, we can offer a slightly risky layer through tax-free bonds. The government has big plans for developing infrastructure, railways, 100 smart cities, etc., all of which will require funding. If these come to the exchange then it will create a feeling of trust among investors.

Currently we have around two crore investors. My understanding is that by 2035 at least 25 – 30 crore investors will be parking funds in the market, and these numbers can materialize only if we provide risk-free products today.

Yes, BSE and S&P Dow Jones Indices are now partners with a 50 -50 JV. The latter is a global leader in providing investable and benchmark indices to the world market while BSE has a very good brand in Sensex. We are good at creating a brand but not that good at marketing and monetizing it, which is something S&P can help us with. Thus, S&P has the resources and technology to market our indices. We are earning about Rs 50-60 lakh, which is just enough to meet our costs. Now, we are hoping that in the next 4-5 years, the revenue will jump almost 100 times.

Now our indices such as the Sensex, BSE 200 and BSE 100 will be co-branded S&P. We expect our partnership to help the BSE raise the growing acceptance of the Sensex and the other BSE index benchmarks, and to help BSE achieve a leadership position in the index derivatives’ space. It also makes sense for S&P because they can strengthen and expand their presence in India and South Asia for it gives them a springboard for the ASEAN market.

In my opinion, India will need USD 3 trillion as capital for just infrastructure development. If we say that a half has to come from the banking system, USD 1.5 trillion will come out of the markets. For that to happen, the market has to be ready to deliver USD 1.5 trillion per year. Today, it is raising merely USD 10-15 billion dollars a year along with debt. Therefore, it has to go up 10 times, which can only happen if we have a layered approach comprising risk-free products and then slightly risky products such as corporate bonds, equity and derivatives.
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We are still in the capital formation stage, which will go on for the next 20 years. If we want to become a USD 20 trillion economy, we also have to become a USD 20 trillion market. But for me this kind of capital formation can happen when the market is created on the basis of trust.

We are not a run-of-the-mill organization. BSE is different. This is a stock exchange. I have a philosophy: if an organization doesn’t add value to society, it will be either be ignored or forced to shut down. A national stock exchange therefore has a tremendous role to play in making the country prosperous.

My work motivates me because through it I am connected to nation building. I aspire to create markets that can be trusted by people. For me, a market is the best equalizer. You can be from the highest pedigree and still lose money, and you can be from the lowest pedigree and still make money. Deep in my heart, I also believe that the market is the most meritocratic organization. If we can create trustworthy and orderly markets, then they will serve the country better than any other institution we have.