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BSE hurtles towards new millennium work ethic

With India's most celebrated stock exchange index, the BSE-30 Sensitive Index or Sensex, hovering at levels at once close to the dream figure of 5000, the Bombay Stock Exchange, Asia's oldest and India's premier bourse, is basking in glory. For once, the BSE seems to have tided over the crises that have been holding it from becoming a new-age born-again bourse.

The BSE is acquiring a new face that will be a far cry from the jungle images of bulls and bears -- that of a techno-savvy, investor-friendly and regulator-compliant stock exchange. In other words, it is seeking to give a decent burial to its one-time sullied image -- the legacy it had unwittingly inherited from successive scams, directors' indiscretions, brokers' avarice, aggrieved investors' fury, enraged market regulator's strong-arm tactics.

As it hurtles towards information technology, dematerialised shares and generally transparent operations, the BSE is making news more and more for its surging total market capitalisation, prudential reorganisation of groups of shares, countrywide expansion and long-term vision.

The BSE now draws inspiration from world class stock exchanges like the New York Stock Exchange. The latter has decided to extend its operating hours so as to reach out to the international customer. Yashwant Sinha's February 1999 budget spoke of allowing Indian exchanges to open trading terminals abroad. The BSE bosses believe it is a matter of time before action in this direction ensues.

Another major exchange in the US, the Nasdaq Stock Market, is apparently planning to go in for the online surveillance system that the BSE installed recently.

Investment analyst Chetan Parekh agrees things are changing. He says, "The new role of the exchanges will be to facilitate transactions at the lowest cost." He feels there would be dis-intermediation in the exchanges, and brokers will be have to provide more value-added services to investors. "It will be an era when exchanges will be run like businesses," he adds.

Agree market analysts. They say Indian exchanges have miles to go before they can play catch up with world class bourses. They say the 120-year old BSE is still dominated by brokers and run as a non-profit organisation.

They point out the BSE's credibility had taken a severe beating in the past because brokers were found to manipulate share prices and misuse privileged information. This has created an impression that the National Stock Exchange is poised to relegate the BSE to the sidelines.

Anand Rathi, the BSE president with an impeccable record in corporate management at the AV Birla group behind him, claims otherwise. He says the BSE has been working toward a scene where the role of brokers is harmless. The number of brokers on the governing board has been cut by about fifty per cent. The governing board has been entrusted with the primary task of policy framework and business development. It has been freed from the task of day-to-day administration.

According to Rathi, business done on the BSE has been rising consistently. He contends that the BSE market-share has increased to 30 per cent, in the same breath adding that arch rival NSE's has fallen to 40 per cent from 45 per cent.

Elaborating, he says business on the BSE in 1998-99 has grown by 50 per cent over that of 1997-98 whereas the NSE's growth has been restricted to eight per cent. He adds, for good measure: "The important point is, trading on the NSE is restricted to about 1,300 scrips whereas the BSE has three to four times the number. So the comparison is not fair."

When it comes to technical issues, however, the NSE still seems to retain its edge over other exchanges. As internal reports of the Securities and Exchange Board of India indicate, the BSE has been running on ad-hoc decisions. There are several cases where the special margins have been applied on an ad-hoc basis. The same goes for applying circuit-filters on scrips and their time-frame which is decided by the surveillance department. Moreover, there is lack of data as far as the financial soundness of the brokers goes. SEBI sources point out that the BSE has faced a lot of problems in the past because of the above inconsistencies.

According to NSE Managing Director Dr R H Patil, the bourse "has been modelled in a fashion that makes it more professional in its approach than others". It is like a corporate entity that seeks to be profitable. "We are basically a business entity which provides services," says Dr Patil. "And this is the concept of a stock exchange that will become the standard."

Market observers say the BSE's main problem is a huge unproductive workforce. Even BSE loyalists admit this means a drain of resources and lack of cost-effectiveness. Rathi, however, says that throwing away the excess labour is not the solution. Presently, the BSE is retraining its workforce. "The disadvantage is that we are not lean; the advantage is that the experience is much greater," he explains.

Rathi also reveals that BSE has the lowest cost-per-broker at 0.3 basis points whereas the NSE's is 0.9 basis points.

Most analysts see a contradiction in the BSE's attempt to be broker-run even as it seeks to be a non-profit organisation. "Brokers seek profits. So the running of an organisation gets automatically affected when huge money is involved," says an analyst.

Rathi says the BSE is contemplating a code of ethics for the brokers on the governing board. The code will bar the broker-director from obtaining price-sensitive information from members of the administrative department. " In fact, they have already agreed that they won't ask for any price-sensitive information from the BSE administration," he adds.

But can the code be a panacea? A SEBI panel has recently suggested that the powers of a stock exchange president (who is also a broker) should be curtailed. SEBI has also suggested that the role of the president, who is a nominee of brokers, should be curtailed as far as operations aspect of the exchanges goes. Further, the market regulator has recommended that a defaulting broker should be barred for a period of five years.

The BSE is gearing up to launch new services and segments. It has introduced a Z group of shares where suspect companies are clubbed so that small investors can steer clear of them. Derivatives trading is the next big move, for which "the necessary systems are in place". Only the wait is for SEBI's final approval. There are plans to expand the BOLT network to 2,000 cities in the next two years.

Analysts say a Sensex at the 5000 level may give just the kind of impetus the BSE needs to switch gears. This may happen sooner than later.

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