Mumbai / Bangalore: The defunct Delhi Stock Exchange (DSE) is attempting a comeback as is the Bangalore Stock Exchange, which has 340 members but hasn’t seen any trades in the past five years.
A comeback: The Delhi Stock Exchange building. Until the early 1990s, India had 21 regional stock exchanges, but following the 1994 entry of the National Stock Exchange, most of them fell by the wayside. Ramesh Pathania / Mint
Both are offering incentives to lure back companies and traders to what were once strong regional exchanges.
Until the early 1990s, India had 21 regional stock exchanges, but following the 1994 entry of National Stock Exchange Ltd (NSE), which introduced satellite-linked terminals, most of them fell by the wayside.
The 124-year-old Bombay Stock Exchange (BSE), Asia’s oldest bourse, adapted computerized systems and survived, but failed to spot the opportunity in equity derivatives, in which NSE now has a virtual monopoly.
The Bangalore Stock Exchange has its systems open but none is operating; instead, its brokers trade on the NSE and BSE. The exchange has one trading platform, but plans to install a new platform over the coming months, according to one of its executives, who didn’t want to be named. Last week it advertised for a new executive director.
DSE has begun talks with other regional exchanges that have shut down to bring members and companies of these exchanges into its fold. Three regional exchanges, Ludhiana Stock Exchange, Jaipur Stock Exchange and Ahmedabad Stock Exchange, have tentatively accepted the proposal, said Brij Kishore Sabharwal, a member of the DSE governing board. Mint could not independently verify the claim.
DSE is offering various schemes to other regional stock exchanges, brokers, delisted companies and technology partners, to restart trading. It is also talking to former members who moved to BSE and NSE to come back “home”.
“Today, nearly 50% of volumes on the commodity exchanges comes from Delhi-based members. According to our calculations, close to 27% of NSE volumes also comes from Delhi. We have asked them to give some volume to their mother exchange, to which they owe their existence,” said Sabharwal.
The infusion of fresh capital through a demutualization scheme in 2007 has helped the exchange financially and strategically.
Demutualization is a process by which a mutual company owned by its users/members converts into a company owned by shareholders. Financial Technologies of India Ltd, a market leader in exchange architecture, bought a 5% stake.
Others who now hold stakes in DSE include Passport Capital Llc, a US-based private equity fund; Bennett, Coleman and Co. Ltd (BCCL); Television 18 Ltd; New Delhi Television Ltd; and realty firms such as Parsvnath Developers Ltd and Omaxe Ltd.
“We will see the first trade by October,” Sabharwal claimed.
BCCL, publisher of The Times of India and The Economic Times, competes with HT Media Ltd, which publishes the Hindustan Times and Mint.
An uphill task
Competing with the established exchanges will be difficult for any new entrant, brokers said. Even BSE, despite its high visibility, is struggling to find its footing in the derivatives market and recently hired Madhu Kannan as chief executive officer and some derivatives specialists as well to win derivatives market share.
Kannan had worked as head (emerging Asia, West Asia and North Africa) at the New York Stock Exchange’s Euronext segment.
According to Anil Bagri, alternate president, Association of National Exchange Members of India, a body of brokers, differentiation will be key. “If the new exchange is going to offer the same products, it’s going to be an uphill task to compete with NSE and BSE. If you look back, new exchanges have done well when they start with a new product line.”
“Competition is good in any business activity. It would lead to better service and newer products. But such competition should not lead to players entering the game with an objective of capital appreciation,” said an official from a Mumbai-based exchange, asking not to be named because of the apparent conflict of interest.
Both DSE and Bangalore are significantly lowering barriers to entry by offering sops to traders and companies.
DSE, for example, is making special offers to trading members and companies. Many of the 2,800 companies originally listed on the exchange have been delisted for non-compliance over the past few years after trading volumes fell.
It has also launched an amnesty scheme in which, besides waiving 25-30% of listing fees, DSE has eased compliance requirements on 17 different counts, including submission of annual and quarterly statements and appointment of key officers. This may sound like dilution of regulatory norms, but H.S. Sidhu, a DSE director, claimed the exchange is “allowing ease in listing compliances within the regulatory requirements.”
“Through the amnesty scheme, over 210 companies have relisted. We have collected over Rs2 crore as listing fees,” he said.
The minimum net worth criterion for trading member has been set at Rs13 lakh, a fraction of the Rs1 crore that BSE requires, and the Rs3 crore that NSE asks for.
Of that amount, Rs12 lakh is in the form of refundable deposits and are allowed to be adjusted against margin requirements.
“So, far we have about 379 trading members. To increase our reach, we have launched a countrywide membership drive,” said Sidhu.
To woo small firms for listing, Bangalore Stock Exchange has kept the minimum paid up capital requirement at Rs3 crore, lower than the Rs5 crore that a company requires to get listed on BSE and Rs10 crore for NSE.
“We want to ensure that all those small firms which are not able to get listed on BSE or NSE either due to issues of market capitalization or networth come to us,” said the executive at the exchange mentioned earlier.
The listing fee at the Bangalore Stock Exchange too is much less than what NSE and BSE ask for.
The ‘small’ factor
The new DSE could explore the space where BSE and NSE are not present in, said Bagri, pointing to smaller companies that only have equity capital of Rs1 crore or Rs2 crore. “These companies will find it attractive to raise capital on DSE,” he said.
Hundreds of companies that were earlier listed on the regional exchanges, and trading members (brokers) are no longer able to access the capital market due to the stringent entry barriers. It is this space that DSE is planning to cater to.
DSE will allow trading of the companies listed in the defunct regional exchanges as “permitted securities” in addition to the 1,000-odd “common companies” which are currently trading on either NSE or BSE.
In London, for example, the alternative investment market, a division of London Stock Exchange, provides a separate platform for small companies and even start-ups to raise equity capital.
DSE has partnered with International Business Machines Corp. and Financial Technologies, one of its investors, to build a nationwide trading platform, complete with disaster recovery services.
“We are providing technology for clearing and settlement platform, like we provide to many other exchanges around the World,” said a Financial Technologies executive who didn’t want to be named.
MCX Stock Exchange Ltd, or MCX SX, a Financial Technologies subsidiary which currently operates in the currency derivatives segment, has also applied to capital markets regulators for permission to launch equities trading.
But whether the new platform will bring companies back remains to be seen. R.H. Patil, NSE’s founder chairman and chairman of Clearing Corp. of India Ltd, a transaction settlement firm, said, “Technology alone doesn’t solve the problem. Investor community’s confidence needs to be brought back; that is going to be critical.”
Some big brokers are also not convinced yet. Vikram Rathi, executive director of New Delhi-based brokerage BLB Ltd, and who was a member of DSE until 2005, said he will wait and watch.
“The critical issue would be to attract big traders. Once the critical mass is attained, then the exchange will pick up. There is a place for an aggressive player to come in,” Rathi said.