Markets
NSE's loss could be BSE's gain
Summary
- The timing of NSE's IPO may not be opportune if the markets regulator decides to accept the recommendations of the Padmanabhan committee, set up to curb excessive retail participation in futures and options.
Can the National Stock Exchange (NSE) get lucky this time on its listing? After failed attempts earlier, NSE is seeing brighter chances of its initial public offering (IPO) in the near future after India’s markets regulator closed proceedings in the co-location case against NSE and its officials, citing a lack of evidence.
However, the timing may not be opportune if the Securities and Exchange Board of India (Sebi) accepts the Padmanabhan committee's recommendations. The committee was set up to curb excessive retail participation in futures and options (F&O), especially in the latter.
The most critical recommendation is to limit expiries to one per week per exchange. NSE has four weekly expiries, with Nifty on Thursday and Bank Nifty on Wednesday being prominent. Others are Nifty Midcap on Monday and Finnifty on Tuesday. The weekly expiries introduced in FY19 are responsible for the explosion in options trading volume. If the limit of one expiry per week is implemented, then it is likely that NSE will opt to retain Nifty and sacrifice the others.
NSE’s total revenue in FY24 was ₹14,780 crore, and transaction charges accounted for 82%. Options revenue contributed 65% of the total revenue; futures and cash contributed the rest. FY24 profit after tax (PAT) was ₹8,306 crore.
Also read: Sebi may adopt all Padmanabhan committee measures to curb retail F&O frenzy
BSE is trading at a price-to-earnings multiple of 65x based on FY24. Assuming the same price-to-earnings multiple, NSE’s valuation works out to ₹5 trillion based on FY24 PAT.
During the June quarter (Q1FY25), NSE’s transaction charges were up 44% year-on-year to ₹3,623 crore. The cap on expiries could lower the volume of trading in options and thus hurt revenue. Even a 20% hit on revenue due to the likely change in Sebi regulations would wipe off a significant chunk of the reported consolidated profit. While Q2FY25 is also expected to see good year-on-year growth, the visibility for the second half of FY25 would be affected drastically if Sebi becomes stringent about options trading. This is because any reduction in revenue won’t have a corresponding drop in costs; there could be a significant impact on net profit.
BSE's gain
Still, NSE’s loss could be BSE’s gain. With weekly options opportunities restricted on NSE, it could perk up activity in BSE weekly options even as its two expiries are possibly curbed to one.This is mainly because the speculative interest is unlikely to be affected, as per a recent Sebi study, which points out that despite consecutive years of losses, more than 75% of loss-making traders continued trading in futures & options.
The interest from options sellers, generally institutions and high net worth professionals, has been increasing in zero days to expiry options trading. Such volumes have gained traction globally as benign interest rate conditions have attracted option sellers. BSE would only hope that the interest from option buyers does not dry up.
Also read: Nine out of 10 individual F&O traders lost money in FY24, Sebi study reveals
Meanwhile, it is also likely that with weekly options opportunities coming down, there could be greater interest in the single-stock derivatives launched by BSE. The single stock derivative expiry happens on the second Thursday of a month, which is a half way mark as NSE does so on the last Thursday of a month. Against this backdrop, the almost 30% gain in BSE’s shares since August is hardly surprising.
