Mar­ket-Maker:

NSE has had a trans­for­ma­tional im­pact on the In­dian stock mar­ket for over a quar­ter cen­tury of its ex­is­tence.

India Business Journal - - CONTENTS - IBJ BU­REAU

NSE has had a trans­for­ma­tional im­pact on the In­dian stock mar­ket for over a quar­ter cen­tury of its ex­is­tence.

It was more than an im­age makeover for Na­tional Stock Ex­change (NSE) in early Au­gust. The coun­try's premier stock ex­change launched a new logo to cel­e­brate 25 years of its ex­is­tence at a glit­ter­ing cer­e­mony in Mum­bai. The new logo, with dashes of marigold, yel­low, red and blue, sym­bol­ises in­tegrity, ex­cel­lence, trust and com­mit­ment.

"I re­call the day when NSE was inau­gu­rated by me in 1994. Since then, NSE has played a crit­i­cal role in In­dia's cap­i­tal mar­ket and the growth of the In­dian econ­omy," re­called former Prime Min­is­ter Man­mo­han Singh, speak­ing at the grand NSE event. Mr Singh was then the fi­nance min­is­ter, who had helmed trans­for­ma­tion of the In­dian econ­omy from pre­dom­i­nantly so­cial­ism to a rel­a­tively, freer, mar­ket econ­omy.

The econ­o­mist-prime min­is­ter had launched op­er­a­tion of NSE on Au­gust 8, 1994, which in­ci­den­tally changed the face of the In­dian stock mar­ket for­ever. The coun­try's largest stock ex­change and world's fourth-largest one by eq­uity trad­ing vol­ume was in­cor­po­rated in 1992 as a tax-pay­ing com­pany. It was recog­nised as a stock ex­change in 1993 un­der the Se­cu­ri­ties Con­tracts (Reg­u­la­tion) Act, 1956.

The Mum­bai-based stock ex­change com­menced op­er­a­tions in the whole­sale debt mar­ket seg­ment in June 1994, eq­ui­ties seg­ment in Novem­ber 1994 and the de­riv­a­tives seg­ment in June 2000. The fu­tures and op­tions (F&O) trad­ing, in fact, helped In­dian mar­kets break free of the opaque and scam-rid­den Badla sys­tem for trad­ing eq­uity for­wards.

The stock ex­change, which cur­rently en­joys 90 per cent share in the eq­uity mar­ket seg­ment and near mo­nop­oly in the eq­uity de­riv­a­tives seg­ment, was also among the first in the coun­try to launch plat­forms for cur­rency de­riv­a­tives, ex­change-traded funds, bonds, govern­ment se­cu­ri­ties and stocks of start-ups and SME com­pa­nies. With its foray into com­mod­ity de­riv­a­tives trad­ing, NSE is all set to emerge as a key player in this seg­ment too. The stock ex­change's flag­ship, 50-stock in­dex, the Nifty 50, is used ex­ten­sively by in­vestors in In­dia and around the world as a barom­e­ter of the In­dian cap­i­tal mar­kets.

New eq­uity era

Over its quar­ter cen­tury of ex­is­tence, NSE has in­deed had a trans­for­ma­tional im­pact on In­dian cap­i­tal mar­kets. Twenty-five years ago, the In­dian stock mar­ket was a pale shadow of the vi­brant mar­ket that it is to­day. The eq­uity cul­ture was lim­ited to a few pock­ets in a few cities, and stock ex­changes were both owned and man­aged by bro­ker­ages, lead­ing to ram­pant mal­prac­tices. Trad­ing was an opaque af­fair, car­ried out with es­o­teric code words and ex­otic hand sig­nals in­de­ci­pher­able to the com­mon man. And when de­faults hap­pened, traders and ex­changes of­ten col­luded to min­imise their losses and max­imise the pass-through to the in­vestors.

Un­der such cir­cum­stances, NSE opened for busi­ness at a time when the In­dian cap­i­tal mar­kets had just been hit by the Har­shad Me­hta scam. The ex­ist­ing ex­changes - Bom­bay Stock Ex­change (BSE), Asia's old­est bourse and a string of re­gional stock ex­changes - were in the iron grip of bro­ker car­tels and ar­chaic set­tle­ment sys­tems and were prone to fre­quent crises. NSE was nat­u­rally set up in the teeth of for­mi­da­ble op­po­si­tion, and it soon changed the old ways of the mar­ket in unimag­in­able ways.

The new stock ex­change's com­bi­na­tion of tech­nol­ogy, risk man­age­ment and gov­er­nance was way ahead of its time. As a de­mu­tu­alised ex­change, it be­came the first one in In­dia to sep­a­rate own­er­ship, trad­ing and man­age­ment func­tions. With elec­tronic, screen-based trad­ing, it fa­cil­i­tated in­stant price dis­cov­ery and trade. It cre­ated its own com­mu­ni­ca­tion net­work to spread trad­ing ter­mi­nals across the coun­try.

NSE's sep­a­ra­tion of own­er­ship and man­age­ment, in essence, played a vi­tal role in bring­ing about the much­needed trans­parency in the coun­try's stock ex­changes. The price in­for­ma­tion, which could ear­lier be ac­cessed only by a hand­ful of peo­ple, could now be seen by a client in a re­mote lo­ca­tion with the same ease.

The pa­per-based set­tle­ment was re­placed by elec­tronic, de­pos­i­tory-based ac­counts, and set­tle­ment of trades was al­ways done on time. NSE was also in­stru­men­tal in cre­at­ing Na­tional Se­cu­ri­ties De­pos­i­tory (NSDL), which al­lows in­vestors to hold and trans­fer their shares and bonds se­curely, elec­tron­i­cally. It also al­lows in­vestors to hold and trade in as few as one share or bond.

This not only made hold­ing fi­nan­cial in­stru­ments con­ve­nient but, more im­por­tantly, elim­i­nated the need for pa­per cer­tifi­cates and greatly re­duced the in­ci­dents of forged or fake cer­tifi­cates and fraud­u­lent trans­ac­tions that had plagued the In­dian stock mar­ket. NSDL's se­cu­rity, com­bined with the trans­parency, lower trans­ac­tion prices and ef­fi­ciency that NSE of­fered, greatly in­creased the at­trac­tive­ness of the In­dian stock mar­ket to do­mes­tic and in­ter­na­tional in­vestors.

More­over, one of the most crit­i­cal changes was that a ro­bust risk man­age­ment sys­tem was set in place so that set­tle­ment guar­an­tees could pro­tect in­vestors against bro­kers' de­faults. NSE was a part of a quar­tet of in­sti­tu­tions that to­tally changed the face of the In­dian cap­i­tal mar­kets. The other three were the Se­cu­ri­ties and Ex­change Board of In­dia (SEBI), NSDL and Clear­ing Cor­po­ra­tion of In­dia. The four or­gan­i­sa­tions were led by vi­sion­ary lead­ers, such as R H Patil, G V Ra­makr­ishna and C B Bhave, who hap­pened to be mar­ket-mak­ers in the true sense.

Chal­lenges ahead

To­day, NSE has over 2.5 lakh trad­ing ter­mi­nals. It added 18 lakh new in­vestors last year, of which 40 per cent came from out­side In­dia's 100 largest

cities and towns. With over 1,900 com­pa­nies listed on the ex­change and over 2,200 se­cu­ri­ties traded on it, NSE clocked turnover of over Rs 72,00,000 crore in FY18 and recorded mar­ket cap­i­tal­i­sa­tion (m-cap) of more than Rs 150,00,000 crore

De­spite its big achieve­ments, the coun­try's largest stock ex­change finds it­self mired in a maze of con­tro­ver­sies. It has come un­der a cloud of the so-called 'co-lo­ca­tion scam', which has al­ready led to a man­age­ment shake­out and a de­fer­ment of its IPO. More­over, the Com­pe­ti­tion Com­mis­sion of In­dia has re­cently ruled that NSE had used its dom­i­nance to in­dulge in preda­tory pric­ing in the cur­rency de­riv­a­tives seg­ment. There have been heated de­bates about the gov­er­nance stan­dards at the ex­change as the former chal­lenger has now be­come the dom­i­nant player.

Mean­while, NSE MD and CEO Vikram Li­maye and his new team have a host of is­sues and chal­lenges to ad­dress and res­tore the stock ex­change's by­gone aura. There is a need to fur­ther de­velop the mar­ket for risk cap­i­tal, both eq­uity and debt. The lat­ter is per­haps a more ur­gent prob­lem, given the fact that the bank­ing sys­tem is in a mess. NSE will have to help de­velop deeper bond mar­kets as larger com­pa­nies be­come more de­pen­dent on cor­po­rate bonds. It will also have to get more re­tail in­vestors to buy govern­ment se­cu­ri­ties (G-Sec) and thereby deepen the G-Sec mar­ket.

NSE built its ini­tial suc­cess based on its tech­nol­ogy plat­form. It re­mains to be seen how the bourse adapts to the next wave of tech­nol­ogy, such as blockchain. The ex­change is al­ready ex­per­i­ment­ing with the pos­si­bil­ity of us­ing blockchain for set­tle­ments.

It is also do­ing its bit with new ini­tia­tives, such as en­cour­ag­ing a repo mar­ket in cor­po­rate bonds, al­low­ing re­tail in­vestors to get ac­cess to govern­ment bonds on a non-com­pet­i­tive ba­sis in the Fri­day auc­tions, try­ing to on­shore global prod­ucts based on the Nifty in­dex and de­vel­op­ing a bond ex­change traded fund. In short, over the past 25 years, the story of In­dian cap­i­tal mar­ket de­vel­op­ment has been in­ex­tri­ca­bly linked to the NSE story. It will con­tinue to be so for the next 25 years as well.

NSE MD and CEO Vikram Li­maye and his new team have a host of is­sues and chal­lenges to ad­dress and res­tore the stock ex­change's by­gone aura.

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