There is a steep hill to climb when it comes to catching up with the competitor, admit Mr Madhu Kannan, Managing Director and Chief Executive Officer of Bombay Stock Exchange, and Mr Ashish Kumar Chauhan, Deputy CEO, speaking to Business Line . But BSE is forging its own path to become a financial infrastructure provider, they say.

What is the future for BSE? What lies ahead seems so insurmountable.

Madhu Kannan: It is a tough hill to climb, but we are taking the right steps. We decided that we will transform ourselves from an entity that is primarily into cash trading to more of a financial infrastructure entity.

We brought down the cost of our membership from Rs one crore to Rs 10 lakh. We got approval to launch the SME exchange. We decided to take controlling interest in CDSL, which fits into the financial infrastructure strategy.

We've been mandated by the IRDA to set up an insurance depository — Central Insurance Depository Ltd. What CDSL was for the equity segment, this will be for the insurance segment.

First we innovated on the product side, changing the settlement cycle to the middle of the month as opposed to NSE's end of the month. We made our equity derivatives to be delivery-based. And then we introduced innovations in pricing.

The other initiative is our big emphasis on financial training, both on a commercial basis under the newly formed BSE Institute and in a non-profit perspective.

We have made some moves in trading in power products at the NPEX. For the national power exchange, we are partnering with NTPC and NHPC and Power Finance Corporation.

How is your delivery-based derivatives trading doing?

Kannan: The last week has been one of the most important weeks for us. We have had a re-launch of the derivatives market with a new approach. We call it the Liquidity Enhancement and Incentive Programme. We are giving incentives to market makers to help create a market, and to other market participants to come in as liquidity providers. Overall, 350 members have already registered to be members of the BSE's derivatives segment of which almost 80 of them are market makers.

Chauhan: Our beta scheme (beta version of derivatives trading platform) is basically so that when the mainstream launches on Diwali day, the members are all ready with their front office, back office and customer contracts.

For the first three days 90 to 100 members participated, which is very good. The volumes were Rs 340-odd crore on the first day which was not reached in the last several years.

Most people might agree that delivery-based settlement gives depth to the market. But what would persuade people to trade on your derivatives segment when they can easily settle through cash on other bigger exchanges?

Mr Chauhan: In the derivatives market, after 10 years of its existence, there is so much concentration; 100 people account for more than 90 per cent volumes, right? This is going by reports. The fact that more than 100 brokers and several others participated (in BSE's new derivatives platform) itself is an indication of the times to come.

Because every retail shareholder has some shares in his portfolio, this (delivery based settlement) allows him to earn more than dividend, it creates a formal mechanism to earn money out of the assets which you already have and you want to keep.

The way this works is internationally derivatives are settled by delivery so that people don't manipulate the market. The second part is that today we have pushed even people who want to invest into speculative activity. Delivery-based settlement allows you to do hedging. Today in cash-based settlement, there is no way you can do hedging.

But you are confident that people will go in for this, given that the lending and borrowing mechanisms have also not taken off?

Mr Chauhan: People hedge and plan for the most mundane things of life. For financial markets, which is their life savings, blood and toil, why wouldn't they plan? And why would we presume, a priori, that people in India do not require to plan their cash flows, their investments, their returns? It is too haughty on the part of the exchanges which do that. Today, by not giving them the ability to hedge, we have basically pushed them into day trading.

Mr Kannan: The good thing is there is more and more popularity for our benchmark index product and single-stock futures and options. And now we have a different product as opposed to the competitor. You are going to see some interesting things. The existence of two similar and yet different contracts could probably result in an increase in volumes on both exchanges.

If you look at statistics, you find that the number of liquid stocks has decreased over a period of time on the BSE and the NSE. So are you suggesting that all these stocks be moved to the SME exchange?

Mr Chauhan: On the SME side, currently the framework that SEBI has come out with is for the newer companies. How to make them more traded and also have more retail participation? Getting this delivery-based derivatives is one of the ways.

Mr Kannan: The SME exchange is not a short-term solution. And again, we are not going to be in the numbers game of who is going to get more companies. Again, this is a long-term effort to create what NASDAQ did in the US — create an ecosystem that has gone on to be able to generate the Microsofts, the Ciscos of the world.

You have done very well in the last three years when it comes to income. But profit after tax has remained at the same Rs 220 crore. What kind of costs have you seen in the last two years?

Mr Kannan: We made a lot of investments in technology. We have gone on record to say we are going to invest Rs 120-odd crore. We have a lot of things on the legacy side. And you know we've got some really good shareholders, domestic and international, we have George Soros, Caldwell. We are the only exchange to my knowledge that does quarterly reporting on consolidated basis, starting last quarter.

So if somebody says being listed increases transparency, I say we are already doing all that we expect a listed company to do.

You are giving terminals for free in East and South where you were not present. How many terminals would it take for you to break even?

Mr Chauhan: Today the concept of access has become very different because of cloud computing. We now have our new servers and provide Fastrade … which is basically on the cloud. Instead of each member setting up his own trading terminals, or his own personal network individually, across the country or region to connect to his investors, today it is very easy to provide that facility to the member by the exchange at very low marginal cost. Not only on the Web, but also on the mobile. Because of that a small broker with Rs 10 lakh as capital is able to compete with the richest brokerage houses in the world.

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