BSE-USE Merger (Transcript of Interview on CNBC)

Below is the transcript of Rajnikant Patel and Alok Churiwala’s interview with CNBC-TV18’s Latha Venkatesh and Ekta Batra.

Latha: What does this mean, is this a big difference for BSE in terms of size? 

Patel: More than size I think it is positive for BSE in the way that both the exchanges now can look at synergy and a larger pie of business and consolidation which is a good thing. I think it is a step in the right direction. Now whether it will actually increase the BSEs volume, of course the addition of USE volume definitely will come in, in the segment in which they are trading but how positively it will impact the other segments of BSE's volume that remains to be seen.

Latha: What are the strengths of USE? Which segments of BSE gets strengthened you think?

Patel: Currency futures is what USE trades in. So, that is a segment which probably will add on to the BSEs overall pie. That is what the USE was initially formed for, to concentrate exclusively on that area which segment will now add more to BSEs existing volume in that particular region. What is happening otherwise the market was getting split on two or three – NSE is trading in the segment, BSE is there, USE, MCX-SX. Now, bringing BSE and USE together would consolidate at trading volume.

Latha: What do you see as the big gain for the BSE broker and more importantly for the exchange itself? 

Churiwala: I think it is a great deal both from the perspective of the BSE as well as USE. Primarily from the BSE, they are buying into a competitor so as to say because USE was on the currency segment. BSE has just launched its currency segment and they are doing volumes of little over Rs 5000 crore on a daily basis. So, that is one positive that immediately flows out of this deal. Secondly, the linkages that USE has with banks, BSE will be able to leverage on this relationship. Thirdly, the brokers who have erstwhile been on USE will now also be directly able to access the BSE platform to start with probably the currency platform and with the blessings of the regulator the futures and options and cash trading platforms as well. From the USEs perspective if we look at the shareholder of the USE, USE as a exchange was going nowhere and I think they will now be buying into an exchange which is got 130-140-year-old history, which is probably also on the verge of listing. From existing BSE brokers perspective if we see it is again a great positive because willy nilly a valuation is being discovered for the exchange, a valuation is being discovered through an M&A deal, through an independent third-party valuation, which is close to almost Rs 4000 crore. All in all I think it is a win-win for all parties concerned. 

Ekta: Do you think that the possible BSE listing would fructify or is even on the cards?

Churiwala: The BSE brokers who also hold almost 40 percent shareholders of the BSE Limited have been waiting for this listing since the last seven years. I believe that BSE has also applied for in-principle permission to list with Securities and Exchange Board of India (Sebi) for over a year now. So, there are moves in that direction and in a market place so dynamic I think we should be seeing the BSE listing sooner rather than later. Across the globe you will see large cross-border exchanges buying into each other and it is only a question of time before Indian exchanges also come on that radar. While on this I would also like to make one more point that foreign bourses cannot buy into Indian exchanges over 5 percent as the regulation stands today. I think it is about time that is seriously looked into because until any foreign player can take a serious stake in an Indian entity the strategic nature of a relationship will never fructify.

To List or not to List..

The fact that, India is on the verge of a great Economic boom is well known and acknowledged by the world. If such is the scenario, the future of its Capital Markets can definitely not be bleak. Hence, it brings into cynosure the MII’s like Stock Exchanges, Depositories, Clearing Corporations etc. Business has grown manifold, from a single exchange dealing only in Cash & Forward we now have many exchanges dealing in several segments- Cash/Futures in Equites/Commodities/ Currencies etc, all functioning in a competitive environment and getting the best deal for investors (especially the small investors). From a paltry volume of Rs.500 crores daily, our exchanges now turnover Rs.2,00,000/- crores and the same is expected to grow exponentially.

As the markets expand and deepen, herein, lies the opportunity for the small investors. They should be allowed to participate in this process by way of being allowed to invest in shares of Stock Exchanges viz NSE, BSE, MCX, USE etc. This is possible only if these exchanges are allowed to be listed. This would be no different than investing in Stocks belonging to the PSU basket.

There are misgivings that certain speculative tendencies will emerge and upset the independent working of such institutions/companies. It is noteworthy that there are already enough checks and balances in the system to detect/prevent such occurrences.

While there may be some merit in the argument that profit should not be the sole motive..

There are already examples of listed companies whose profits earned/distributed are regulated viz. Listed Power Companies.

The NSE was founded on the basis of a ‘Model Stock Exchange’. It was formed as

A ‘For Profit’ Corporate entity. It has made Road Shows to investor abroad. This had increased the hope of local small investors that the exchange would be listed some time in the near future giving them an opportunity to invest and be a part of its success.

The BSE & other regional exchanges which were ‘Not for Profit’ , Association of Persons were corporatised into ‘For Profit’ Corporate entities. This sent a signal to the small investors that they would be listed some time in the future.

Internationally, too, the scene is no different. There are several leading exchanges that

Not only self listed but are examples and models of successful running of exchanges and they too play the role of regulating themselves.

Given our strong regulatory system, we should be able to overcome and cope with whatever challenge that may arise. Another issues is raised with respect to “Monitoring Mechanism’ but should the small investor be deprived of this Golden Opportunity to invest just because of lack of forming appropriate mechanisms and it also gives rise to the question that are monitoring mechanisms not already adequate and do the small investors desist from entering a system which is inadequate?