BSE's Dream Run

Ardent followers of 24/7 mundane business channels will be familiar with advertisements proclaiming Nifty-50 as the stock of the nation. But on the equity trading screens these days, BSE is the new stock of the nation. The share price of Asia's oldest equity exchange is on a dream run. The rally has outperformed shares of every other listed financial company in India this year. From the lows seen in March, BSE shares have gained a whooping 350 percent to tough new life time highs and yet some experts believe the trend could continue. In the battle of the bourses in India, BSE was always the underdog. Although its share price had been in an up trend amidst the market recovery after COVID, its recent sharp up move has surprised many. What's cooking?

Just nine months ago, such buoyancy with regard to BSE was missing. In January, around 36 percent institutional shareholders of BSE (among the voting participants) had rejected Sundaraman Ramamurthy's appointment as the exchange's new MD and CEO. He was replacing Ashish Chauhan, the founder team member of the National Stock Exchange (NSE) who after a 10 year stint as BSE chief was moving back to the NSE as its MD and CEO. The voter turnout for Ramamurthy's appointment too was ridiculously low at just 17.69 percent. His name was not in the initial list of candidates given to SEBI by the BSE board. But when SEBI seemed unhappy with the board's initial suggestions and Ramamurthy's name came up, the regulator gave its thumbs-up.
Ramamurthy's magic wand
Before Ramamurthy, a decade was spent at the BSE in putting up the building blocks for the exchange in upgrading its technology and regulatory prowess that averted its shutdown. BSE rose to be the world’s fastest exchange sans major technical glitches, went public and managed to add a chapter on corporate governance to its textbook. It was also no secret that BSE stood up to NSE's hegemony and the MD and CEO prior to Ramamurthy conceptualized new segments like exchange based mutual fund investments even in the face of an unfriendly regulator. 

For long, SEBI was awestruck by NSE's former bosses Ravi Narain, Chitra Ramkrishna and other influential board members of the exchange. Then, the two NSE bosses were so powerful that they could lock-up SEBI officials in a room when they visited the exchange's premises for inspection. In such a scenario, many attempts of BSE at attracting volumes fell short as the game was often skewed due to the regulatory regime that mainly favored the NSE. How SEBI turned a blind eye to NSE's scandalous launch of co-location based algo trading that propelled it to a monopoly, crippled India's 17 other regional stock exchanges and nearly finished BSE, is a chapter in history.

But the credit for BSE's new stardom, on the back of visible green shoots of revival of its derivative segment, should go to Ramamurthy. In just nine months of him taking charge, BSE's derivative segment has sprung back to life. And Ramamurthy is doing this without any doles or incentives to brokers for generating volumes that the BSE was used to giving earlier. BSE spent nearly Rs 400 crore in various market-making and incentive schemes over the past few years but derivative volumes were never sticky on its platform. Thus when the market saw that BSE was suddenly attracting some derivative volumes, after Ramamurthy came in, its share price started reacting.

Although at age 62 Ramamurthy started new innings where he has to lead from the front, in the past, he has always worked from the shadow of his bosses. At Bank of America, prior to joining BSE, Ramamurthy was the blue-eyed boy of Kaku Nakhate. A high flying investment banker, Nakhate is the country head of Bank of America in India and believed by many to be in the good books of successive Prime Minister's, over the past two decades.. She is also well respected in Mumbai's power lobbies and regulatory corridors of SEBI and RBI. Ramamurthy is the second senior official from Bank of America to lead BSE. Earlier, when BSE was chaired by Deepak Parekh's confidant Jagdish Capoor, the exchange had roped in Madhu Kannan as the MD and CEO from New York where he was the MD of Bank of America-Merrill Lynch. Then, Nakhate was the head of Global markets for DSP-Merrill Lynch in India. Later, when Bank of America gobbled up Merrill Lynch, its Indian partner and DSP founder Hamendra Kothari also sold his stake to the US bank.

But before Ramamurthy moved to Bank of America in 2012, he cut his teeth at the NSE where he worked under Narain and Ramkrisha for two decades between 1992 to 2012. Even as NSE won several accolades at the world stage, Ramamurthy, who was the chief of products there, never really hogged the limelight. So how did he turn out to be a prize-fighter for the BSE? Old NSE insiders and observers of India's exchange space say, there is little wonder that Ramamurthy has learned a thing or two from his stint at NSE on building bridges with the regulator. The buzz word is that SEBI's sudden benevolence towards BSE is due to 'Ramamhurthy's magic wand.'

SEBI's balancing act
After Ramamurthy moved to BSE, SEBI dropped the earlier stringent requirement of registering at a single trading venue for clients. As per SEBI's recent circular, brokers have to compulsorily register clients to trade on both NSE and BSE and the clients have to specify if they want to opt out of any one. This was not the case earlier. Most brokers registered their clients only on the NSE, since it had higher volumes and there was no regulatory compulsion to sign-up for both options. Effectively, this meant that even if BSE was giving a better price quote on some instances, nobody cared. NSE had a higher volume pool and most chose to execute their trade there.

"All the brokers are mandated to register their new clients on all the active exchanges. For existing clients, the stock brokers are mandated to offer them access on all active exchanges..." SEBI said in a circular on June 21. Brokers also have to seek a client's negative consent for not opting to register on both exchanges.

Although a lacuna in the rule making, such soft changes were never envisaged by SEBI even when BSE was on the verge of shutting down. Hence, Ramamurthy's magic touch is believed to be a force behind SEBI's change of heart now, observers say.

Every large online broker can now provide default options to clients to trade on both NSE and BSE. There is a view that brokers that own a stake in BSE will be more than happy as they don't have to justify to clients their reasoning for registering on BSE too.

Ramamurthy also waved his wand in June after NSE announced a change of the expiry day for its popular Bank Nifty contracts. To keep ahead in the race of expiry day volumes, NSE had declared that it was shifting the expiry of its Bank Nifty contracts to Friday from the decade long practice of keeping the same on Thursday. This was with a clear view to deter the shift of volumes on BSE's Sensex and Bankex contracts, the expiry of which was changed to Friday by Ramamurthy recently. On the expiry day for the derivatives contracts, the trading volumes are extremely high due to the rush to shift positions and NSE did not want Ramamurthy to have the cake alone. But in a sudden U-turn, just days after making the earlier announcement, NSE issued a joint press statement with BSE and said that it had dropped its plan to change the expiry "in the interest of market development." Here too, SEBI's nudge is likely to have done part of the magic, insiders say.

This exclusivity of expiry to BSE seems to have worked for it well. As per a report by HDFC Securities, BSE's derivatives market share on expiry day is now 30 percent that of the NSE on Friday. (BSE Friday vs. NSE Friday).
 

Earlier, a SEBI rule on putting small company stocks under the mandatory call-auction mechanism had hurt the exchange badly. While the NSE has 1600 listed exclusively on its platform, the BSE has more than 5000 stocks. Under the call-auction rule, which was earlier made popular by NSE linked researchers Ajay Shah and Susan Thomas and adopted by SEBI, stocks that had low volumes and turnover were mandatorily allowed to trade only once a week. Also, the trading was not continuous but orders were collected first and then matched in regular intervals, which was frustrating to most brokers and hence volumes on BSE even in the cash segment had started to decline.

A couple of months ago, after a plea was filed in the Securities and Appellate Tribunal, SEBI without any resistance or appeal, decided to relax call-auction rules to allow trading for the entire week - advantage BSE.

This apart, sources say that many large brokers, high frequency traders, foreign funds and insurance companies too have received an informal but a stern nudge from various regulators to trade more on BSE from now on. Truly, there is a regulatory coconscious and an attempt to bring duopoly in India's stock exchange space, experts say. But there is also a view that a balance is required in the commodity exchange trading space too, which has largely remained neglected despite several troubles.

Derivative boost
In addition to SEBI's support, Ramamurthy's ways are yielding results for BSE, so far. 

As per a recent report by HDFC analysts Amit Chandra and Vivek Sethia, BSE's market share in India's equity derivatives segment has gained momentum. It has risen from nil in April to 3.4 percent in August on a monthly basis. On the expiry day, BSE had more than 11 percent market share in derivatives, the report says. The rest is all with NSE. According to HDFC, much of BSE's derivative market share is in the weekly options contract of its benchmark index Sensex. But the icing on the cake is that these volumes are without any incentive scheme.

"The derivatives volume is organic and is driven by 219 members (proprietary and retail) and the active UCCs (unique client codes) on the BSE derivatives platform have reached 0.17 million, from nearly zero in three months. We expect BSE derivative market share to reach 10 per cent in Q4FY24E (fourth quarter of financial year 2024), driven by on-boarding of large member brokers, the launch of new weekly index contracts, hedging activity and a continued increase in active traders. The increase in derivatives volume will boost cash volumes too," the HDFC report said.

HDFC further said, "Steps taken by the new management are yielding results and will boost growth and margin. We expect a revenue/EPS (earnings per share) CAGR (compounded annual growth return) of 19/25 percent over FY23-26E, led by a revival in transaction revenue. We increase our EPS estimates by 7 / 11 per cent for FY24 / 25E, increase core multiple to 28x (vs 25x), and upgrade rating to BUY."




BSE still has a long way to go. Currently, 100 percent of BSE's derivatives volumes is concentrated only in the index options segment, which SEBI has often termed as high risk for retail investors. It's a pure lottery. But then, index options on NSE too account for 98 percent of its derivatives volumes. Yet, 2 percent of other stock futures and index futures on NSE is huge in terms of sheet capital since it recorded an average daily trading of more than Rs 300 lakh crore (around $400 Billion) in July.

HDFC report says that NSE derivative volume is 30 times larger than BSE and it has registered a 10 year volume CAGR (compounded annual growth return) of 62 percent. NSE's options turnover is 28 times higher than BSE but on the basis of options premium traded, it is 75 times more than BSE. NSE’s premium to notional ratio is 3x of BSE. The cash market share of BSE is around 7 percent now.  

Risk Factor

BSE has a much lower cost regime than the NSE currently but the rising volumes could bring in some additional burden for the exchange. This is mainly as the stock exchanges have to pay a turnover fee to SEBI from their own pocket and higher the turnover, more could be the out go for the exchanges. Also, while the NSE pays the turnover fees to SEBI on notional turnover volumes in the options segment, the BSE has been paying the turnover fees on amount of premium traded. It means that whenever SEBI decides to rationalize the collection of turnover fees and make it similar for both exchanges, either the NSE will have windfall gains or the BSE will have to shell out more. But if SEBI decided to keep its collection of fees at the amount of options premium traded then it would mean a loss to government exchequer as a lion's share of SEBI's income now goes to the government, experts said.

Turnover fees on notional value is premium of option traded plus the value of the underlying asset. But the same on premium means only on total value of premium traded. Premium traded largely is not even 1 percent of the underlying index options, where 98 percent of trading volumes are concentrated.

Also, BSE has so far tried various pricing mechanisms (steep discount/nil charges) in most of its segments to compete with NSE but was unable to garner market share. The new management has decided to match pricing with NSE as they believe that exchange transaction charges do not trigger volume shifts. BSE has increased cash transactions, currency futures and listing fees to match with NSE. BSE’s cash and listing charges are now at a premium to NSE. But BSE charges are far lower in index options segment, which is where all the volumes are being generated.

BSE transaction charges in options are Rs 50 per million versus Rs 350 per million of NSE. Thus, to manage extra outgo of SEBI turnover charges, it will have to increase its options transaction charges significantly. Considering the options segment turnover in August and if the trend remains the same going ahead or its market share improves, rough estimates suggest that BSE will have to pay SEBI turnover charges of more than Rs 10 to Rs 12 crore per month based on the current month volumes. NSE has provided Rs 275 crore for payment to SEBI as turnover fees for quarter ended June 2023.

BSE also has a very high notional to premium turnover compared to the NSE, which means it will have to raise its transaction charges as its volumes goes higher. If BSE has to pay SEBI turnover fees on notional value, its outgo will be several fold higher. Similarly, BSE's contributions to settlement guarantee fund, clearing charges will also have to increase several fold, experts say.

For the quarter ended June 2023, BSE reported that its consolidated net profit had jumped over 10 times to Rs 440 crore from Rs 40 crore in the same quarter last year. But that was only one time profit due to sale of Rs 468 crore stake in depository player CDSL to meet SEBI shareholding requirements. Revenue from operations during the April-June period was up 15 percent to Rs 216 crore, compared with Rs 187 crore in the corresponding period of previous year. But balance sheet shows that profit before exceptional item and tax was just Rs 69.21 crore in the June quarter compared to Rs 83 crore in March. Profits from exceptional items were shown at Rs 504 crore.



Tough Task Master
Compared to the previous regime at the BSE, Ramamurthy is a tough task master who cooks his evening rice in the office. BSE insiders say he has also renovated shower cubicle and purchased new furniture to spend long hours in the office. Ramamurthy has roped in his former NSE colleague Kamala Kantharaj as BSE's chief compliance officer, who is delegated most of the work, sources say. She replaced Neeraj Kulshrestha who left BSE.

BSE's former senior officials have been moved to other roles or are being eased out. Deepak Goel, who earlier worked with Kotak Group, has been hired as the new chief financial officer in place of Nayan Mehta who has been redesignated as chief, special projects. Sunil Ramrakhiani is the new chief business officer (equity). Also, Sameer Patil is still designated as chief business officer. Apart from doing propriety work in past few years, Ramrakhiani was the director and chief officer of Way2Wealth Securities and VP and head of Commodities at IL&FS Securities. Ritu Kundu joined as the new head of HR in January. Shivkumar Pandey chief information and security officer has submitted his resignation, sources say. Many of other senior BSE employees under the previous regime have left or are on their way out and new recruitments in senior positions are in the offing, the sources say.

Changing fortunes of BSE has made ace investors like Madhu Kela, broking firm Zerodha and Quant Mutual Fund turn bullish on the exchange, markets experts say. BSE chairman SS Mundra is also the chairman of MK Ventures Capital, a listed company owned by Ace Investor Madhu Kela.