Sucheta Dalal :For whom the closing bells toll (1 Sep 2003)
Sucheta Dalal

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For whom the closing bells toll (1 Sep 2003)  

The closing bell is ready to ring for many of India’s small and regional bourses, which have seen no trade for several years and are surviving on listing fee income. The Indian capital market, which in the 1990s seemed set to follow the exact path of the US markets of the 1920s, have carved their own trajectory. Unlike the New York Stock Exchange (NYSE), which responded to the challenge of the American Stock Exchange and the creation of the Securities Exchange Commission (SEC), India’s oldest bourse, the Bombay Stock Exchange (BSE) preferred to fight the regulator and lobby politicians. It also perceived no immediate threat from the newly set up and professionally managed National Stock Exchange (NSE). And the rest, as they say, is history.

The NSE set global records with the speed of its growth, innovation and professionalism while the BSE struggled to keep up and the Regional Stock Exchanges (RSEs) struggled to stay alive. Many RSEs are now under the charge of Sebi-appointed administrators, who know little about capital markets or their history. Fed on brokers’ views about the capital market, they are increasingly suspicious about what they think is a NSE ‘monopoly’. And, with typical ignorance about history and disregard for facts, some of these administrators attribute NSE’s growth to government support. Some even seem to perceive their mandate as ensuring a revival of the bourse at any cost. An effort in this direction would be misplaced and counter-productive. All over the world, stock exchanges have survived by voluntarily merging their operations. The passing of The Securities Laws (Amendment) Bill, 2003, by the Lok Sabha last week, now paves the way for stock exchanges to be corporatised or shut down. In this scenario, it is imperative for the capital market regulator to play a strong developmental role in nudging the bourses in the right direction. A single dominant bourse, which trades in a select number of scrips, is not adequate for the Indian markets. While the NSE will remain India’s leading exchange and will introduce newer products in its derivatives segment, it has no interest in listing smaller cap stocks which have the potential to form a separate market. Clearly, there is space for a NASDAQ like alternative, which will trade in smaller companies and aspire for listing on the larger bourse when they grow. Also, while the NSE’s performance has been exemplary so far, a single large bourse or a single dominant depository is not in investors’ interest in the long run. But it must be remembered that the NSE has attained leadership in a fair and free manner because the competition failed to keep up and there should be no effort to stifle its growth. The alternative is to develop a separate market that caters to a different set of scrips. So far, the Securities and Exchange Board of India’s (Sebi) policy has been one of benign non-interference. It even supported various experiments to keep the 20 RSEs alive.

The OTC Exchange of India (OTCEI), which failed to take off because of unclear objectives and disharmony between its promoters was the first experiment. The second was to allow RSEs to set up subsidiaries that became members of the two national exchanges and operate like a large brokerage firm. This has met with some success, but cannot have a long term future, especially if the RSE parent ceases to exist. So far, these subsidiaries don’t seem to have realised that they cannot survive forever in this form. A third experiment was the Inter-connected Stock Exchange (ISE), which aimed to create a third national trading platform by linking the RSEs. The ISE also failed to take off, and ironically enough, is a member of a national bourse through the subsidiary route. The ISE has turned out to be an unnecessary addition to India’s already excessive 23 bourses. The ISE chief, M.R. Mayya has now structured yet another ambitious plan. It is to create a separate trading platform for small-cap stocks, which would list companies with a capital of under Rs 20 crore. This aims at merging the RSEs and linking with the BSE to create a new entity called Indonext. But Indonext is facing rough weather even before its take off, since the BSE has opted out of the project. The BSE, which lists over 6,000 companies, has almost 4,000 companies in Indonext’s target group. And although initial volumes are likely to be just a couple of hundred crore rupees, it could grow exponentially if the concept works. Without the BSE, the Indonext plan may well fizzle out. The idea of creating a separate platform for smaller cap stocks is laudable and necessary. It will not only impart much needed liquidity to these small stocks, but would also allow the new exchange to focus more closely on disclosure standards of these companies and their propensity to manipulate stock prices. The question is, should this merely be a separate segment of the BSE or should the BSE convert itself into a NASDAQ like exchange.

It is here that Sebi needs to provide some guidance and encouragement in helping restructure the capital market. There is no doubt that any move to change the very structure of the BSE would meet tremendous internal resistance. But once the number of broker directors on the governing board of bourses is down to a third, as per the 2003 amendment to the Securities Laws, Sebi will be able to push through changes much faster.

In the US, over the counter Electronic Communication Networks (ECNs), that have spun off from information dissemination services or such as Reuters or brokerage firms are offering tough competition to the Nasdaq and eating into its trades. While this may be a dangerous alternative and would be difficult to regulate, their existence shows that technology makes it possible for small bourses to experiment, innovate and develop active markets for small or more specific groups of stocks and other instruments.

But no new alternatives will develop, if the regional bourses and the BSE are only focussed on staying alive, with the same old structure and trading model. They will need some help from SEBI to push them in the right direction.

-- Sucheta Dalal