|Ashish Kumar Chauhan, CEO of the Bombay Stock Exchange|
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These are heady times for India’s two big stock exchanges, as they turn into listed companies in their own right, launch new offshore trading platforms and expect to prosper from fresh inflows of capital, following the country’s big bang demonetization and pension fund changes.
The long-standing rivalry between the large, powerful Bombay Stock Exchange and the much younger, nimbler National Stock Exchange is hotting up, thanks in part to Ashish Kumar Chauhan, an intensely competitive figure who now runs the BSE but who is intimately familiar with both exchanges.
Chauhan can rightly be considered one of the most influential figures in modern Indian finance, given that he has upended the world of stockbroking not once but twice. He co-founded the National Stock Exchange in 1992, then cashed in his chips and took a sabbatical, before joining in 2009 the far older and more illustrious Bombay Stock Exchange, where he has injected some much-needed verve and drive.
When Asiamoney met Chauhan, he had finally pulled off the BSE’s own listing after years of bureaucratic delays and was eager to point out several areas where the exchange was beating the competition.
Despite getting in first, the BSE’s IPO is likely to be overshadowed later this year when the NSE launches its own initial stock sale. Bankers expect that to raise as much as $1.5 billion, marking possibly the biggest onshore listing since Coal India’s blockbuster $3.5 billion sale in 2010. Existing NSE investors are expected to put up around 25% of the company via the sale, which is unlikely to include any new stock.
What happens next? As long as Chauhan remains in charge, the BSE will not be allowed to rest on its laurels. Chauhan is not to be underestimated, his peers and rivals say, hinting at a well-concealed but intensely competitive streak. “Don’t be fooled,” says one veteran Mumbai-based investor, “there’s a lot going on back there. He was at the NSE when it overtook the BSE, and he wants to return the favour.”
The government’s drive to channel more pension money into listed securities augurs well for both exchanges. And India’s controversial demonetization of the economy in November, which initially hit domestic stocks hard, may in the long run see more savings diverted from the informal economy into financial assets, benefiting share prices. So far at least, that theory seems to be holding true: the Sensex has gained 5.8% in value since November 8, while the NSE’s benchmark index, the Nifty 50, is up 4.1%.
For the immediate future, Chauhan wants to increase BSE revenues while expanding its range of services at home and abroad: “We’ve been developing products that may not look like much at first glance, but which are going to develop over time, from the distribution of corporate bonds and mutual funds, to our focus on small and medium-sized enterprises.”
Chauhan points to the BSE SME Exchange, which is home to 164 thriving Indian companies. Based on trading volume, it is roughly four times larger than the NSE’s Emerge platform, which hosts the shares of 37 smaller firms.
The BSE is also forging working relations with its peers around the region. “We’re working on a data-sharing partnership with Dubai Financial Market, and helping smaller bourse in the likes of Sri Lanka, Nepal, Mauritius and Bhutan to develop,” says Chauhan. “In the long term I would like to see more interaction between us and the major indices in the rest of the Brics [the group of nations whose other members are Brazil, Russia, China and South Africa], allowing investors to trade directly between those countries.”
Then there is the India International Exchange (INX). Wholly owned by the BSE, the new exchange will operate 22 hours a day from within a special economic zone, the International Financial Services Centre (IFSC), based in the northwest state of Gujarat. A pet project of premier Narendra Modi while he was governor of Gujarat, the INX went live on January 16. It circumvents India’s strict capital controls and allows licensed international investors and non-resident Indians to trade domestic securities and equity, currency and commodities derivatives from anywhere around the world.
“The zone has its own legal and tax system,” Chauhan says. “It will trade in US dollars, and will operate like an offshore securities market, but one based within India’s borders. So, as Hong Kong is to China, which has its own capital controls, so the INX will be to India. This is an important financial step for India and for our long-term development as a stock exchange. The NSE has announced their intention of setting up their own exchange [within the IFSC], but we got there first. We beat them to it.”
That jibe, which doubles as a reminder that the BSE can, when required, move with alacrity, is a sign of the ambition that burns inside this quiet poacher-turned-gamekeeper.
When he co-founded the NSE in 1992 as the country’s first demutualized electronic exchange, it led to a shake-up in the capital markets. By the time he quit in 2000, the NSE had become India’s leading trading platform. Companies flocked to the new exchange, attracted by its speed, reliability, better technology and willingness to adapt. When regulators lifted a ban on derivatives trading in 2000, NSE chiefs were quick to see the product’s potential. By the end of 2016, according to consultancy Oliver Wyman, the NSE accounted for 85% of all equity cash trading, 94% of equity derivatives and 59% of currency derivatives.
Grand old fixture
By contrast, the BSE was something of a grand old fixture, even a semi-mythical one, in the annals of Indian finance. Founded by a group of Gujarati brokers on a hot spring day in 1875 under a banyan tree, the bourse bumbled along quite happily for the first hundred-plus years of its life. Companies came and mostly stayed: as of the end of February, the BSE hosted the shares of 5,300 corporates, of which only about 3,000 are actively traded.
It often seemed impervious, even allergic, to change. When the NSE was launched, its older rival mostly ignored the young upstart, continuing to generate the lion’s share of its profit from listing fees and market data, but shying away from risk. Even when the derivatives market began to flourish, the older, broker-driven outfit, terrified of venturing into the unknown, opted largely to snub the new financial product.
“When derivatives trading was approved, the BSE did not want to participate and the NSE did,” Chauhan says. “That’s how the BSE got left behind.”
From his former vantage point at the helm of the NSE, Chauhan watched his rivals wrestle with the issue. “It wasn’t easy for them,” he adds. “They had an old content system and there was a general feeling that India wasn’t ready for derivatives – remember, this was only a few years after Nick Leeson brought down Barings Bank. I was the person who pushed derivatives hardest at the NSE, which is why I’m viewed here as the father of modern financial derivatives. But it was a risk. A lot of people at the time said I was crazy.”
Ask a cab driver at a railway station to take you to the stock exchange and he will bring you here, not to the NSE
- Ashish Kumar Chauhan, BSE
Slowly, the Bombay Stock Exchange was left behind, gasping for air. It was not until 2009 that the older institution finally learned its lesson and brought Chauhan – who had been enjoying life as managing director of the Mumbai Indians, a cricket team playing in the nascent Indian Premier League – on board as deputy chief executive officer. Three years on, he secured a double promotion, becoming the BSE’s managing director and CEO.
Despite his title and successes, there is nothing flashy about him. His corner office on the 29th floor of the BSE is cramped and a little grungy, the walls adorned with unframed and slightly dog-earned photos of Chauhan with his wife and son, and with his hero Sachin Tendulkar, the Indian cricket player.
Chauhan plays the role of the self-effacing and humble hard worker well, saying he was lucky to have been granted “a few key skills that let me succeed in the world of modern finance.” When asked if his achievements match his ambitions, he says, with just a flicker of a smile, “I never had any aspirations. I just let myself float along.”
As Asia’s oldest stock exchange, and one of the largest in the world, with a market capitalization of around $1.7 trillion, the BSE remains a communal byword for stockbroking.
“If you think of a stock market in Mumbai, it will be the BSE,” says Chauhan. “Ask a cab driver at a railway station to take you to the stock exchange and he will bring you here, not to the NSE.” And its benchmark index, the Sensex, comprising the country’s 30 largest and most actively traded stocks, serves as a measure of India’s overall economic health.
But it’s hard to argue with raw data. The NSE reported earnings of $84 million in the six months to the end of September 2016. Compare that to the BSE, which made a net profit of $20 million, and it’s clear Chauhan hasn’t won the competition yet.