CONTENTS Introduction BSE BSE Restructuring NSE NSE Group Companies Competitive Landscape The Road Ahead
INTRODUCTION The Bombay Stock Exchange Ltd. (BSE) was established in 1875 and is the oldest exchange in Asia and was the only exchange for investors in India to trade in stocks (equity shares) till 1995. In 1995, National Stock Exchange Ltd. (NSE) promoted by financial institutions was established. Within a short span of time the NSE with remarkable product innovations, use of technology and professional management was able to overtake BSE and emerge as a leading stock exchange in India.
In 2005, BSE had a market share of 31.11% in the cash segment and 0.63% in the derivatives segment, Corresponding to NSE’s 68.39% (cash) and 99.37% (derivatives) respectively. In 2005, BSE converted into a corporate entity (earlier an association of brokers) to compete with NSE operations. The ownership and management of the BSE were separated from the trading rights.
BSE It was established in 1875 when 318 individuals contributed Re.1 each and became members to form "The Native Share & Stock Brokers Association". It was the first stock exchange in India to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956. BSE a voluntary non-profit association of broker members emerged as a premier stock exchange after the 1960s. The increased pace of industrialization caused bythe two world wars, protection to domestic industryand government’s fiscal policies aided the growth ofnew issues which in turn helped the BSE to prosper.
BSE dominated the Indian capital market with over 60% of the total turnover of shares traded. In 1986, the exchange came up with an index called SENSEX, comprising of 30 representative stocks. The stock were selected on the basis of their market capitalization, number of trades, average value of shares traded per day (as a percentage of total number of outstanding shares), balanced representation of industry, leadership position in the industry, continuous dividend paying record and track record of promoters. This index subsequently proved to be the barometer of the Indian stock market. Sensex emerged as a prominent brand in the country. Sensex was scientifically designed and based on globally accepted construction and review methodology. The base value of Sensex was 100 taken as on 1978-79.
The carry forward system or badla was a unique selling proposition of the BSE. Badla provided the facility for carrying forward the transaction from one settlement to another. It was the postponement of delivery or payment for the purchase of securities from one settlement period to another. This facility of ‘carry forward’ provided liquidity and breadth to the market. By bringing in outside money to fund the carry forward of long positions, badla acted as a bridge between the money market and the stock market. However, with the securities scam outburst in 1992 Securities Exchange Board of India (SEBI) took over the control of the stock market and banned the badla system in 1993.
Until March 1995, BSE had an open outcry system of trading. With the entrance of NSE - the country’s first modern, computerized and professionally managed stock exchange in 1994, BSE had to change its system of trading and operations. In 1995, BSE adapted itself to the BSE online Trading System (BOLT), an electronic trading system through which brokers traded using computers. The surveillance, clearing and settlement functions of the exchange were ISO 9001:2000 certified.
Badla system was later revived and resumed in 1996. In 2001, due to the sharp fall in the prices of ICE scrips across the globe and the recession in the global economy resulted in a significant erosion of market capitalization of stocks on the NASDAQ and at other leading stock exchanges around the world , the value of the Sensex fell to 3788. The aftermath of this scam led to SEBI banning badla once again and possibly for ever. In 1999, BSE set up the Central Depository Services India Ltd. (CDSIL) co-sponsored by the State Bank of India, Bank of India, Bank of Baroda and HDFC Bank.
By 2005, the network of BSE spread across 417 cities, with over 800 members and 14,426 terminals. It registered about 1.4 million transactions per day, and an average daily turnover of about Rs.25 billion.Restructuring In 2005, the BSE was de-mutualized and was registered as a corporate entity under the provisions of the Companies Act, 1956. In 2005, BSE along with Federation of Indian Stock Exchanges launched a national trading platform called BSE Indonext, for small and medium enterprises. This platform helped SMEs to raise capital and trade through BSE Online Trading and its website trading system.
NSE Promoted by leading financial institutions was incorporated in 1992 as a tax-paying company (unlike other stock exchanges in the country). NSE was incorporated as a demutualized stock exchange where the ownership and management were deprived of the trading rights. It was set up as a public limited company and owned by leading institutional investors in the country. The Board comprised of senior executives from promoter institutions, eminent professionals in the field of law, economics, accountancy, finance, taxation, public representatives and nominees of the SEBI.
In 1993, NSE was recognized as a stock exchange under the Securities Contracts (Regulation) Act, 1956. The exchange commenced operations in 1994 with the Wholesale Debt Market (WDM) and achieved various milestones . NSE provided fair and transparent services in the securities market to investors with the help of screen based electronic trading systems. This technology-oriented mechanism ensured transparency, shortened settlement cycles and book entry settlement systems and thereby matched the global standards of securities markets.
In 1996, the exchange came up with an index called NIFTY, comprising of 50 large, liquid and representative stocks representing 24 sectors of the economy and 77% of traded value of all stocks on the NSE. The stocks were selected on the basis of low impact cost, high liquidity and market capitalization. The base is defined as 1000 as of November 1995. The index was professionally maintained and reviewed every quarter. In 1998, NSE commenced Automated Lending and Borrowing Mechanism for lending and borrowing of securities (ALBM). ALBM was the answer to BSE’s badla.
NSE members were connected to the exchange from their work stations to the central computer located at the exchange through a satellite using VSATs (Very Small Aperture Terminals). By 2005, NSE had installed over 2,829 VSATs in over 345 cities across the country. By 2004, NSE was known as the third best exchange across the world. NSE won the Wharton-Infosys Business Transformation Award in the Organization-wide Transformation category for the Europe and Asia Pacific region for harnessing technology to create a world class exchange and bringing a revolution in the industry as a whole.
Group Companies NSDL NSE along with the Industrial Development Bank of India (IDBI) and the Unit Trust of India (UTI) promoted dematerialisation of securities and set up National Securities Depository Limited (NSDL) the first depository of India in 1996. NSDL established a national infrastructure of international standard to handle trading and settlement in dematerialised form. NSCCL The National Securities Clearing Corporation Ltd. (NSCCL), the first clearing corporation in India, was incorporated in 1995
. NSCCL sustained confidence in clearing and settlement of securities (equity and derivatives), promoted short and consistent settlement cycles, provided counter party risk guarantees and operated a tight risk containment system. It also operated a Subsidiary General Ledger (SGL) for settling trades in government securities.
NSE.IT Ltd. The 100% subsidiary, information technology arm of NSE. NSE.IT provided products and services in areas of broker front end and back-office, clearing and settlement, web based training, risk management, treasury management, asset liability management, banking etc. IISL In 1998, Indian Index Services and Products Limited (IISL) was set up by the joint venture of NSE and CRISIL Ltd. (Credit Rating Information Services of India Limited).IISL provided variety of indices and index related services and products for the Indian capital markets. DotEx International Limited DotEx provided world class Internet trading platforms to members of NSE to further provide it to their customers. DotEx provided products in two modules: Equity Trading Module and F&O Trading Module.
COMPETITIVE LANDSCAPE NSE with approximately 860 stocks listed on its exchange provided stiff competition to BSE which had around 8,500 stocks listed on its exchange. Around 50% of BSEs cash market turnover came from the stocks other than those in the A group. On the other hand top 100 stocks on NSE contributed approximately 80% of its cash segment turnover. BSE Sensex suffered from hedging effectiveness, higher impact cost and immense political hiccups. NSE within a short period of time overtook BSE due to its administrative improvements and less systemic costs which attracted a lot of investors to NSE.
Earlier the governing board of BSE was an elected body and therefore its members were worried about broker sentiments; but with the changes that took place and with competitive pressures from NSE. broker members (who earlier were considered to be roadblocks) no longer questioned the regulatory bodies. Technically larger trading volumes and superior bid-ask spreads on NSE attracted a large number of traders. More investors at NSE opened different avenues of investment- for e.g. derivatives. Due to the regulations at BSE, it merely concentrated in Mumbai, while the NSE spread along the length and breadth of the country (8,000 terminals across the country) and invited a large number of potential audiences to the exchange. SEBI allowed exchanges to set up trading terminals abroad with the help of Internet trading. Internet trading consisted of two types - order driven trading system and quote driven trading system. BSE provided both these systems while NSE provided only the order driven system.
The Road Ahead The restructuring at BSE required the member brokers to offload their shareholding (i.e. 51%) by 2006. The various avenues considered were to offer an IPO, or enter into strategic relationship or both according to feasibility. Experts opined that if BSE entered into strategic partnerships with large private sector banks it would be exposed to a large distribution network and would also be able to promote new products like derivatives on a large scale. How and what strategy should BSE adopt to not only preserve its historical image but also counter the stiff competition from NSE needs to be seen in the future.