Making The Best Of Our Struggling Bourses

Updated: Apr 11 2002, 05:30am hrs
There is considerable euphoria about the remarkable strides that Indian bourses have made the last few years. Much of this is justified. The introduction of the National Stock Exchange in the mid-nineties brought about a dramatic change in trading practices. For the first time we had a national exchange without provincial limits. This meant that shares found a wider market and investors had a bigger choice. Along with it came the type of automation that one normally associates with developed countries. Through a sophisticated yet easy-to-handle system of V-SATs, online trading was introduced.

This has led to huge volumes on the exchange and enthused foreign investors who look for transparency in dealings. Unfortunately, all this has been at the cost of the 20-odd bourses, which are dying a slow death. The grand old lady of Dalal Street has however survived, though admittedly battered. To begin with, the Bombay Stock Exchange treated the NSE with contempt, and then, with hostility. Soon, BSE learnt that the best way to deal with NSE was to live with it and try to catch up in terms of modernisation of trading practices. It soon created an infrastructure which was as good as the NSE, and it had the added advantage of offering the carry-forward system, popularly known as badla. Even though since July last year it has lost its edge, it is now a good and thriving exchange. With the introduction of derivatives, both NSE and BSE are in full swing.

The other exchanges have not been so fortunate. Among the scores of them dotted all over the country, we can clearly differentiate them into two categories. The one consisting of the venerated exchange in Kolkata at Lyons Range and those in Chennai, Ahmedabad and Delhi are clearly the big boys. They have been around for several decades and have brought out big companies through their pioneering efforts. Then there are the smaller and newer ones in Bangalore, Hyderabad, Kochi, Kanpur, Coimbatore, Ludhiana, Patna, and Guwahati. These were created during the boom times of the eighties and early nineties, when the primary markets expanded outside the narrow confines of a few metropolitan cities. They are all in the soup now without any business.

Doing a post-mortem, it would appear that we made two mistakes in handling this growth. It was, first of all, wrong to have started so many stock exchanges in places where there is no large investor base. Often, political chieftains thought it was a feather in their cap to get a stock exchange in their state, akin to getting a direct flight from Delhi.

We should never have permitted so many exchanges. In fact, the whole of the European Union with a market capitalisation several times that of India has only less than ten exchanges in each of the nations capitals. So these bourses were non-starters and would never have been viable. From that point of view, one would suggest that they all be given a quiet burial. The faster we do it, the lesser the pain.

We may need to handle the other big regional exchanges differently. All of them are strategically located in different parts of the company with their own distinctive characteristics. India is geographically and business-wise diversified too, and from that point of view we could try to salvage these bourses. Right now, out of the volumes of about Rs 6,000 crore that are traded on all the bourses put together, NSE would account for about Rs 3,000 crore, BSE for about Rs 2,500 crore, and all the others put together for the rest. So as it stands today, even the bigger regional bourses at Kolkata, Chennai and Ahmedabad cannot survive with this type of daily volume; and let us remember that after automation, brokerages have fallen from the 1.5 per cent-2 per cent range to just 0.5 per cent levels.

In my view, a possible solution is to make these exchanges the architecture for a new generation of exchanges that we are planning in the liberalised era. On the anvil and ready to take off are exchanges for commodities like sugar, tea, coffee, and, over time, grains also. The world over futures and options are used in a big way by farmers to hedge against the vagaries of supply and demand, and one can see this happening as we liberalise marketing of food products. Metals, both base and noble, are heavily traded in the futures markets in London, Chicago and other places, and there is no reason why India should not have a metal exchange. And last but not the least, currency and interest futures are absolutely necessary to support the growing financial markets. The scope is limitless.

The point being made is that we have great infrastructure in terms of well-automated, regionally powerful exchanges. These have very little volume in the equities markets. These also have excellent networks of brokers with a long tradition of trading. One cannot ask for a better vehicle to push through these new-fangled commodity exchanges. Unfortunately, the thinking in the government is not holistic. In other words, commodity exchanges are being planned in isolation, while the problems of the doddering small exchanges are being dealt with in another compartment. The crying need of the hour is to integrate these two, one an opportunity and the other a threat. Then we may come out all winners.

One way to do it is to make existing stock brokers automatic members of commodity exchanges that are being opened. One should not insist on additional capital for this purpose. The brokers, on their part, would need to retrain themselves so as to understand and then deal in newer products. This is not tough since international traders move jobs between stocks and commodities very frequently. As a supportive measure, the government should organise training programs conducted by international experts. The advantage that stock brokers have is that their trading skills are excellent, whereas the present commodity specialists may know their commodities well but will lack trading skills.

The reforms have made many prosperous, but have thrown many more on the streets. Small-scale industries have been hit beyond recognition. One hopes that the same will not happen to hundreds of stock brokers all over the country who, by and large, have served us very well.

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