Dropping volumes in the cash segment and near negligible business in the futures & options (F&O) category are threatening the profitability of Asia’s oldest stock exchange ?the Bombay Stock Exchange Ltd. In this backdrop, the scheduled board meeting this week could see many strategic decisions being taken to stem the rot at the bourse. A key decision could be on allowing its two strategic investors?Singapore Exchange and Deutsche Borse?to increase their stake in the exchange.
?As of now, the board meeting is on schedule and will be held on Saturday, January 10, in Mumbai,? confirmed the BSE spokesperson, though he declined to comment on the agenda. Sources close to the development mentioned that the exchange will be looking at letting strategic partners increase their stakes and kicking off new initiatives, especially in the F&O segment.
A senior executive with an investment bank mentioned that the two exchanges always wanted a bigger stake?as it would allow them to participate better in the development of the exchange?but the earlier limit of 5% was a bottleneck. However, in October 2008, the Securities & Exchange Board of India (Sebi) had increased the ceiling from 5% to 15% for strategic long-term investors in stock exchanges. The two exchanges were the only strategic participants who had evinced an interest in hiking their stake in the exchange when the limit was increased, he said. Others like insurance companies and banks were reluctant.
Market experts also expect the board to appoint a new CEO, and a senior ranking official mentioned that around four candidates were shortlisted.
For BSE, it is imperative to shore up F&O and the cash business as these are among the biggest revenue earners for it.
According to the FY08 annual report, transaction charges accounted for Rs 109 crore in income and formed 26% of the total income of Rs 420.44 crore. Income from investments accounted for Rs 175 crore in FY08. The exchange had investments worth Rs 2,172 crore as on March 31, 2008.
The turnover on the BSE cash segment has nearly halved from last year when around Rs 8,000 crore to Rs 11,000 crore was transacted daily. The F&O segment does business worth a few lakh. In contrast, on the National Stock Exchange, even though volumes have fallen, has a daily turnover of around Rs 31,000 crore in the F&O segment and Rs 10,000 crore in the cash segment.
The huge fall on the F&O segment has seen several brokers voluntarily close their derivatives business on BSE, as there were negligible volumes and also brokers found it better to allocate upfront margins elsewhere.
However, this time around, BSE would find it difficult to get the same valuations as it did in 2007 when it was valued at around $910 million, and both the strategic partners were offered 5% stake each for $42 million. And the board this time could decide on the extent of stake to be allowed for the two partners. ?
A lot has transpired since, and the issues that the management had in the last year?when the CEO and an independent director resigned?has created concerns,? the investment banker said.
However, it was during this time that the Singapore Exchange had issued a statement saying that it stood by BSE as a partner. The exchange has also placed Wai Kwong Seck on the board of directors.