Sucheta Dalal :Death Of Indian Stock Exchanges (25 November 2002)
Sucheta Dalal

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Death Of Indian Stock Exchanges (25 November 2002)  

For almost a week, the brokers of the Calcutta Stock Exchange (CSE), have been on a strike to draw attention to the fact that the bourse is on the brink of extinction. But their protest has caused barely a blip in the media and made no difference at all to the investor community.

It is probably no coincidence that the brokers’ anger and strike call follows the harshest action ever by the Kolkata police against a bunch of broker-operators who have repeatedly indulged in excessive speculation, price ramping and illegal trading, which the CSE is notorious for. But the official reason for the strike is ostensibly the steep turnover tax that brokers have to pay the Securities and Exchange Board of India (Sebi) after they lost their case in the Supreme Court on the issue. Another reason is the regulators’ refusal to permit them to start derivatives trading through a subsidiary listed on the National Stock Exchange (NSE).

People’s disinterest in what happens to the CSE and its speculator-brokers ought to have been a wake up call for at least 20 other stock exchanges in India. Unfortunately, it has not. Far from realising the extent of apathy and disinterest, brokers across stock exchanges were plotting a nation-wide strike to bring trading to a halt. Fortunately, saner counsel seems to have prevailed, but it is not clear if they are reading the writing on the wall. Today’s capital market is vastly different from 1992, when brokers across the country struck work for almost a week to protest the turnover fee levied by Sebi. At that time, there was no automated, nationwide bourse like the NSE.

Look at the situation today. In 2001-02, seven out of 21 exchanges recorded no business at all. This excludes the Bombay Stock Exchange (BSE), NSE and the OTC Exchange of India (OTCEI). The OTCEI, promoted by various financial institutions is also in the doldrums despite its repeated attempts to revive it.

Moreover, Sebi had allowed companies to cut down their multiple listings and to delist from regional bourses. For instance, Asian Paints plans to delist from seven bourses — Ludhiana, CSE, Ahmedabad, Madras, Delhi, Hyderabad and Vadodara. Others who plan to delist their shares from regional stock exchanges include — Reliance Industries, IFCI, Prism Cement, Shree Rajasthan Syntex, Bhatinda Chemicals, Asian Tea & Exports, Shaw Wallace Gelatins, Jenson & Nicholson and many others. This means a further loss of fees for small bourses. The creation of a Central Listing Authority (CLA) could also reduce listing income further.

Added to this is the fact that good quality stocks are vanishing from the bourses through delisting, while new stocks are not being listed because the IPO market continues to remain in the dumps. As a result, barely 500 scrips out of the 6,000 plus listed on the bourses are actively traded on any given day.

The Justice Kania Committee on demutualisation of stock exchanges has said that no exchange would be able to float a subsidiary, which will make it difficult for regional exchanges to survive by trading on larger national bourses. All these are signals that smaller stock exchanges will have to prepare for closure since they can never hope to compete with the reach and services that the nationwide bourses are able to provide. Unfortunately, there is no sign of such planning or realisation.

The BSE, once India’s leading exchange has been going steadily downhill. It continues to lose market share in the equity segment as its top brokers shift their business to the NSE. Its debt market turnover is largely due to just one brokerage firm and it has not only failed to get its derivatives business off the ground, but has even given up the attempt. Instead, it has written to the Sebi for permission to close down the derivatives segment and has sought permission to start margin trading istead. This margin-trading proposal is nothing but a variation of the badla system, indicating that the bourse would rather move backward rather than forward.

Since the NSE’s debt and derivatives business continues to grow at a furious pace, it is clear that the BSE is doing something wrong. The bourse has lost its dynamism and seems directionless; but this has nothing to do with the fact that brokers are no longer in charge. In fact, the BSE needs good, unbiased, professional management, which will provide education and training to its members (at least those who do not already own multiple memberships on the NSE) to cope with the changing times. The BSE in all probability will react to this criticism with outrage and denial instead of introspection. And some of its members will hatch conspiracy theories to suggest that the government is keen on fostering a NSE monopoly. This attitude is not restricted to the BSE. Even the tiny OTCEI, which has been on the verge of closure for several years, has people on its staff who write to me saying that its problems are due to the monopoly ambitions of the NSE.

This is obviously untrue, and what better proof than the fact that even today, the new finance minister’s maiden trip to Mumbai includes a visit to the BSE and not the larger NSE. NSE monopoly is not in the interest of investors, nor the regulator or even politicians and government officials who have close links to speculators. But there is only so much that the regulator or the government can do to revive the wilting stock exchanges unless they are willing to change.

The Justice Kania Committee report on demutualisation of stock exchanges is scheduled to be cleared by the Sebi board next week. This would provide a big opportunity for regional stock exchanges to merge, consolidate or close down their businesses. Sebi should use this as a chance to nudge smaller bourses towards closure and encourage their broker-members to merge and morph into larger corporate memberships that can trade on the BSE or the NSE. In fact, Sebi should even consider setting up a team of experts to offer counselling and guidance on law, taxation and the corporatisation process to small regional brokers. The Kania Committee’s recommendations could then lead to a massive restructuring of the Indian capital market and reduce the number of bourses to a manageable and revitalised five or six. We would have taken another important step forward in the march towards globalisation

-- Sucheta Dalal