Chanakya IAS Academy Blog

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BSE goes public!

The Bombay Stock Exchange (BSE), established in 1875, was not only the first in India, but the first in the entire Asian continent. With passing time, it has grown to become the tenth largest stock exchange in the world in terms of market capitalization.

BSE's performance can be gauged by the fact that

  • It receives a large amount of its revenue from listing fee. No other stock exchange in the world can beat this performance, not even NASDAQ.
  • Not only this, it is the fastest stock exchange in the world with the timing of 6 micro seconds.
  • It also boasts of having the largest number of listed companies in the world.
  • The S&P BSE SENSEX - is India's most widely tracked stock market benchmark index. It is traded internationally on the leading exchanges of the world, including Eurex and BRCS nations (Brazil, Russia, China and South Africa).
  • BSE had launched its platform to incorporate small and medium enterprises under its BSE-SME.
  • It also recently inaugurated India's first international Exchange, India INX.
  • Soon, it plans to unveil its commodity exchange after it receives regulatory approvals.

Now, it is taking another pioneering work of conducting an IPO (Initial Public Offer), becoming the first such stock exchange in the country to do so. It is a huge market player in India's security market and cannot be ignored. Consequently, its IPO is receiving warm response from major investors.

Strengths of the BSE

  1. SME market

Both NSE and BSE launched their SME platform in 2012. NSE's was called as "NSE Emerge" while BSE's was called as "BSE-SME".

Currently BSE SME has more than five times more number of small and medium enterprises listed on its platform, than that of its rival NSE.

  1. In terms of mutual funds and currency derivates too, BSE rules over the rest.
  1. Its profit margins are comparable to the likes of Stock Giants London Stock Exchange and Deutsche Boerse. It is in fact greater than that of US' NASDAQ.

Challenges confronting BSE

  1. Equity segment

India has a weak equity market making it difficult for companies to borrow domestically. They end up taking loans from banks at much higher rates of interest. A thriving equity market would have provided the Indian corporate sector a breathing space to effectively bargain the interest rates with the lenders or investors. Besides, the rising Non-Performing assets prevent banks from lending to the industries, creating a "lose-lose" situation for all.

BSE has been trying to develop the equity market for some time now, particularly in equity derivatives. It has already spent more than 269 crore INR to incentivize traders to participate in its equity market. But, it is still nowhere comparable to its main competitor NSE who enjoys monopoly in Equity Futures and Options (F&O) market.

  1. Exit of shareholders

BSE's IPO would see the exit of some of its major shareholders like Singapore Stock Exchange. This may be seen as negative as it casts doubts over the bourse's profitability. But the stay of Deutsche Boerse to stay invested in the BSE works as a silver lining.

  1. Ownership of Exchanges

India has restrictions over ownership of exchanges. There are caps to the amount of shareholding an investor can have in Indian Stock Exchanges. Some have to limit themselves to 5% while very few can reach up to the level of 15%.

This prevents major investors from staying invested as there is a limit to the extent they can have ownership over the bourse, limiting their prospects of future growth.

  1. Large competition from NSE

Over the years, BSE has tried to engage more and make a "comeback" when it was shadowed by the much-younger NSE (National Stock Exchange).

NSE was established in 1994, much later than BSE. But its valuation is much higher than that of BSE. It is considered as a "stronger and robust" exchange having great turnover from its equity segment. BSE wants to emulate the successes of NSE.

Way Forward

  1. India needs to revive its equity market segment which is currently quite low when compared to other EMEs (Emerging market economies).

Country

Share of Equity in financial savings (%)

India

5

China

14

Brazil

15

Indonesia

20

USA

42

For this, it needs to replicate the model of NSE who has so far been able to consistently top this chart in the country.

  1. India needs to make ownerships flexible as is the case with the GIFT city in Gujarat where BSE recently launched India INX to avail of these relaxations.
  1. BSE needs to establish its niche in the market hugely dominated by the NSE. For this it has to become more innovative, efficient and quick to launch new products.
  1. For a country like India where equity penetration is low, it becomes more profitable and less risky for the investors to invest in stock exchanges. This will help in the cause of growth of stock exchanges. Other stock exchanges may as well utilize the route of IPO.
  1. Besides, IPO would offer much more flexibility to the BSE to raise capital. This is crucial especially given the fact that India has multiple stock exchanges creating huge competition.

BSE has moved ahead from the era of 1990s when it was seen as a weak predecessor to the NSE. Today, BSE is a much more professionally-managed exchange with huge potential of future growth and huge experience to guide it towards this task.

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