An overdose of bourses

Regional bourses in the country should either merge or perish

Suchetha Dalaal

There is nothing like a scam or a crisis to introduce radical reform. And there is nothing better than a Joint Parliamentary Committee (JPC) to ratify politically sensitive decisions.

The Securities and Exchange Board of India (Sebi) should use the opportunity presented by the recent payment crises to go beyond uniform settlements and a ban of deferral products to force drastic changes in the structure of the Indian capital market. It should do this by creating conditions that would compel a steep reduction in the number of stock exchanges in the country. This will also be essential if Sebi proposes to create an effective and workable real-time surveillance system that can nab price rigging and collusive circular trading instantly. India has 23 bourses—which is a score too many. Speaking at a seminar organised by the Confederation of Indian Industry recently, Georges Ugeux, Group Executive Vice President of the New York Stock Exchange bounced the idea that it may be time to consider a merger of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
But that may be way to radical a suggestion for India. It is good for the Indian capital market to have the two largest and best-governed bourses to continue competing fiercely with each other. Given the size of the country and the 20-million investor population, we probably need another large nation-wide exchange replacing the 20 small ones.

Of the 23, as many as 18 are regional stock exchanges of varying sizes. All of these have been badly hit by the recent scam and their turnovers are down to dismal levels. Uniform account periods and rolling settlements, which will put an end to inter-exchange arbitrage and will further kill their chances of survival. For instance, the Calcutta stock exchange (CSE) which used to boast a Rs 2000 crore turnover, mostly thrived on arbitrage-based trading. Now that the scam has exposed it as a den of illegal speculation and lawlessness, its turnover is down to a tenth and will fall further after July 2. The Delhi Stock Exchange volume is also down to under Rs 100 crores. And these are the bigger bourses. The exchanges at Hyderabad, Cochin, Magadh, Coimbatore, and Mangalore as well as the OTC Exchange of India have been making losses even before the payment crisis and Sebi’s decision to ban badla. Their survival seems impossible after July.

We can attempt to do in the 21st century, what the British and Americans did in the beginning of the 20th century. At the turn of the 19th century the US and United Kingdom had 20 to 30 bourses. Over the years, the US is down to nine and the UK has the one single bourse formed through the amalgamation of all. The Australian bourse is also an amalgamation (made of 1987) of six bourses each about hundred years old. In India, the massive advances in technology and trading systems, the relatively stagnant investor population and economic considerations clearly make the existence of so many independent bourses irrelevant.

A possible solution to the problem is to merge all regional bourses into the Inter-Connected Stock Exchanges of India (ICSEI). The ICSEI was a complicated and convoluted attempt to integrate regional stock exchanges while preserving their individual identities. It got a further twist in its act when low volumes forced the ICSEI itself to seek NSE membership. However, when the ICSEI was conceived, this strange hybrid structure was all that was acceptable because powerful regional brokers would not give up stock exchange management, which they considered a sort of private fief. Now that Sebi and the finance ministry are determined to corporatise (or demutualise) bourses and install professional management, regional brokers would be a lot more willing to consider a merger.

The ICSEI would be best placed to value local membership cards, depending on the size, turnover, profitability and assets of each regional exchange and convert them into direct memberships to a national trading system. Brokers of the smaller, loss-making exchanges may have to pay an additional conversion fee or be given the option to sell out their membership at the same price. It could also integrate the existing staff and infrastructure of the regional bourse into its national system, which will deliver better operational efficiency by preventing fragmentation of trades and allowing better price discovery.

Were this to happen, the ICSEI would emerge as a powerful, third exchange with a nationwide trading system that is on par with the BSE and the NSE. The alternative is to close down at least a dozen regional bourses and then find a way to merge the rest. In any event, regional exchanges have to get the message that they can either merge or perish. In fact, the closure/merger of bourses is routine around the world. Besides, it is not new to India either. In 1917 the BSE, then called the Bombay Share and Stock Brokers Association had a short lived “rival” called the Bombay Stock Exchange Limited, long before the NSE emerged as a far more serious competitor. Similarly, sometime around independence bourses at Hyderabad, Nagpur, Kanpur and, Bangalore came up. During the second world war, as many as four bourses emerged in Ahmedabad, of which two closed down and two others merged to form the current ASE.

It is only after the eighties that exchanges not only mushroomed (15 new exchanges were opened) but the political support enjoyed by their broker-led managements put an end to all notions of merit- or profitability -based survival. A boom in the primary market and a rule that forced companies to list their shares at a bourse which was the regional exchange of their registered offices ensured a steady flow of listing fees. All this conferred some clout which the broker-managements of these bourses were loath to give up. Today the revenue through listing fees has dried up. The Sebi rules allow companies to list on any bourse with a nation-wide system. Also, the Reliance move to delist from all regional exchanges and stay listed only at BSE and NSE is a clear pointer to future trends. It is only a matter of time before all other blue chip companies follow suit. In fact, there is no choice for regional bourses: they can either merge or perish. JPC must ensure that.

Writer’s e-mail: suchetadalal@yahoo.com