The Bombay Stock Exchange, Asia’s oldest bourse at 132 years, has now become a corporate entity with brokers, once the sole owners of the exchange, now holding a minorty 49% stake. In his first interview after the demutualization process, BSE managing director and CEO Rajnikant Patel spoke with Mint and outlined the future for the exchange. Edited excerpts:
What’s the new stake-holding pattern of the Bombay Stock Exchange?
I won’t be able to share with you the exact details as there are confidentiality agreements. Roughly, our two strategic partners, Deustsche Boerse and Singapore Stock Exchange Ltd, own 5% each and we have four international investors of high pedigree who’ve taken 4% each. Collectively, they hold 26% stake in the exchange, the maximum permissible stake under the foreign direct investment route. We have placed a little more than 25% with domestic investors including public and private institutions, corporate entities, and high net-worth individuals.
The underlying idea has been to get a diversified ownership structure...so that we have much rounded inputs from all of them. Exchanges are a different animal than any other for-profit entities. We play the role of an SRO (self-regulatory organization) and therefore, whatever ownership structure we may follow, the regulatory aspect will rest with the exchange.
Has this been done through divestment alone? How granular is the ownership pattern?
We have expanded our equity by 10%, which has been subscribed to by the two strategic investors. The rest was offer on sale. We have investors who have picked up stakes in the range of 0.5%-5%. But mostly it would be between 1% and 5%.
These investors have different motives behind investing in BSE. How will you marry the objectives of such a diverse investors base?
I think that’s true of any company. We have a memorandum of understanding with our strategic partners that goes beyond plain financial investment. We will explore business opportunities. We have an understanding that we will work together to increase the business for both the parties.
What if these investors want to exit?
There is a regulatory continuity compliance requirement for us whereby we have to ensure that brokers’ ownership doesn’t go beyond 49%. So we will devise ways and means to ensure this limit is maintained.
Is there any lock-in period for the investors?
The strategic partners have a lock-in period but the domestic or individual investors don’t have any lock-in period. We can’t disclose the lock-in period due to confidentiality agreement. The important thing to note is that both the strategic partners are willing to learn from our expertise and area of operations. Singapore Exchange represents the Asian perspective and the Deustche Boerse is strong in the derivatives market. We will all work together…
Do we see an IPO next?
I am not ruling out the possibility (of an initial public offering). We may go for a listing with or without an IPO. We have different options available, but there is timeline for it. It will also depend on our business strategy. As of now, we are a zero-debt company and in future, if we feel the need for additional capital infusion, we will see.
Will you list your shares on BSE?
Self-listing is allowed. The regulator needs to bring in certain norms in place. I would not like to see people pointing fingers at the exchange.
You will probably go for an international listing...
At this moment, we haven’t decided about it. But it is well within the realm of possibilities.
The BSE Sensex is the most widely used benchmark for Indian stock markets but the foreign institutional investors are staying away from your exchange and the National Stock Exchange is way ahead of BSE when it comes to trading both in the cash and derivatives segments.
Over the past year, we have seen market interest in Sensex derivatives and single stock futures as well. It’s also a question of liquidity. We believe we have a huge advantage in terms of the mindshare of the Sensex. We have to convert that mindshare into market share. Post-demutualization, things have changed and the BSE is a transformed entity now.
Any change in the business model?
Demutualization is about change in ownership. Management flexibility and independence started a few years ago. Demutualization will help, as we will be able to leverage the expertise of our strategic partners.
Is there any new product line? Or, will you continue to offer me-too products?
In one sense you can say there are 21 me-too products (referring to the regional stock exchanges). It’s not me-too. Every exchange has its own strength and weaknesses that differentiate it from others. BSE has its own unique selling proposition: we offer you an entire range of listed companies. Being a 132-year-old organization, we have had our share of ups and downs. But all that is history. Foreign investors see growth opportunities here and the upside in Indian markets. It is up to the BSE management to live up to their expectations.
The management has a professional approach. The board structure and flexibility that we have now is very different from what we had in the past. I don’t want to bring a Tsunami into the organization during the transformation process. I’m for a slow and steady process that is acceptable to everyone. People are expecting more from us now. And I like the challenge. We are like a nursery for Indian corporations, more so for small and medium term enterprises. Our competence is to bring in access to risk capital. We are putting in place enablers to help small companies raise money.
BSE’s Indonext platform that allows small and medium firms listed on regional stock exchanges to trade on the exchange doesn’t seem to have picked up.
The Indonext model is a platform for providing national level liquidity to companies listed on regional exchanges. It is not a platform where any company can get listed. The companies that are traded on the Indonext platform have to follow BSE’s rules. And you can’t really say it hasn’t worked. We’ve seen concepts like OTCEI and the Interconnected Exchange. Some of the ideas were ahead of their time. Things have changed now and we are connected to the global market. There is an opportunity to experiment
Will you aim for something like London Stock Exchange’s Alternative Investment Market?
That’s a different model. One man’s elixir can be another man’s poison. It isn’t necessary that something successful somewhere will work everywhere.
What do you plan to do with the money raised through equity expansion? Your primary source of income is treasury operations.
Being a 132-year old organization, we have a strong treasury. But this does not mean our transactional income is any less. We have an investment policy and there are restrictions (for investments). Being an SRO, we don’t take equity exposure as other treasury departments do. Our aim is to get more income from listings and other activities.
Any plan to reward the brokers who have sold off their stakes?
Haven’t we rewarded them? They have got fair value. The first broker of the exchange got his broking card for Re1. The maximum one has paid for a broking card is Rs4.5 crore. The last card we sold was for Rs75 lakh. Each card fetched them Rs5.2 crore. And mind you, they will continue to enjoy their trading rights...anybody else would need to deposit Rs1.3 crore. There was a very good response from the brokers. In fact, broker owners had offered an excess 9% stake, which couldn’t be sold.
Do you find the broker owners hostile towards the management? What’s your biggest challenge now?
I haven’t faced any hostility till date. People have understood the value in bringing in professionalism. The challenge is to meet the huge expectations built following corporatization.
Your take on Sensex.
I don’t look at the movement of the index. What is important for the regulator is to see that market integrity and risk management are in place. We have to be on guard constantly.