BSE: Present tense, future imperfect

Sharad Mistry

Once a pulsating and immensely popular stock exchange, clearly the first among equals in the Indian stock market fraternity, 126-year The Stock Exchange, Mumbai, better known as BSE, has controversies dogging it over the past few years. Even while the BSE navigates through one of its most critical times, observers have begun popping the question: does BSE have a future at all?

As current data suggests, the BSE is way behind its eight-year old rival National Stock Exchange (NSE), which has cornered over 65 per cent of the business in the cash market and over 95 per cent in the nascent derivatives segment. Shorn of its 100-year old, albeit highly controversial speculative trading tool, badla, the BSE is struggling to survive in the era of technology-enabled trading and derivatives.

Although, its executive director AN Joshi preferred not to speak about what actually ails the exchange, BSE’s deputy ED Manoj Vaish says: "Till end-1999, the BSE was restrained from expanding its reach across the country. The regulatory advantage has enabled the other stock exchange (read NSE) to develop and build a strong network on an all-India basis, which is not very easy to penetrate. If BSE had been permitted at the same time to expand on an all-India basis, the scenario today would definitely have been very different. This regulatory advantage (to NSE) has put us behind the other exchange by more than four years."

Even though the BSE’s annual report for 2000-01 says it has around 350 professionally qualified employees, market players state otherwise: "There is no professionalism in the exchange; over the past few years, the authorities have not been able to clean the negative image of a ‘brokers den’ run by a handful of powerful stock brokers. Furthermore, it has not established that it is serving the investors’ interests." Evidence of gross irregularities in handling of finances of the exchange and of former office bearers taking undue advantage of their positions has further tarnished its image.

Surprisingly enough, BSE’s insiders reveal that the current state at the bourse has been contributed largely by its own community of members and not just the likes of Harshad Mehta and Ketan Parekh. Some of its top members with memberships on both the BSE and the NSE, have, they say, virtually "turned traitors" by shifting their overall wholesale trading business to the NSE primarily to get patronage from their institutional clients. "This move from its own members has left the exchange gasping for business, other than speculative and retail business", says a former office bearer of the BSE.

Asked whether or not the institutional business has gone down on the BSE, Dr Vaish says : "This is not true. The BSE has consistently had the largest share of institutional business compared to any other exchange". The overall trading volumes and market capitalisation has shown an increasing trend over the past couple of years as can be seen from adjoining table.

A market player argues in defence of the exchange: "BSE has been on the Indian stock market scene for over a century. It has contributed the most in helping investors make money. Because of its long history of existence, chances of misuse of the institution would be more than on the other exchange which has emerged recently. This itself explains the reasons for the so-called tarnished image of the BSE and the near-total clean image of the NSE. But it is not so."

At a time when the BSE aims to rebuild its lost image it would do well to remember the words of a former president who in the early 1990s said : "If the BSE brokers do not improve upon their activities to meet the investors’ interests, things will turn difficult for the BSE." The setting up of the NSE in 1993 did cost the BSE heavily as the investors shifted loyalties.

Despite this, the BSE has drawn out its Vision 2005 - to become The Exchange of Choice in India. Observers state "we cannot write off a 126-year old institution, simply because of activities of some of its members which are not exchange specific but broker specific. This could occur on any other exchange, even the NSE."

In 2000, the BSE aimed at becoming in 2001 a tech-savvy, investor-friendly and a premier stock exchange. By end-2001, it may have attained the tech savvy status -- BSE says it has spent Rs 95 crore on technology during 2000-01 -- but lost out on the remaining goals for publicly visible reasons.

The BSE is looking to step clean from its controversies. It awaits the clearance of the demutualisation and corporatisation plan it has submitted to the Sebi late last year. Currently, its share is just around 35 per cent in the cash market; it wants this figure to reach 50 per cent. But eventually, the real test for the BSE will be on whether it can rebuild its image not just on the strength of its long history (not just the past decade), the renewed plans to reach out to investors across the country, the upgraded technology and the highest number of stocks available for trading and investing, but by delivering on its promise of meeting investors’ interests.