Stock exchanges in a new era of merger

By K. T. Jagannathan

CHENNAI, MARCH 12. Recent reports have suggested that two major stock exchanges in the U.S. - New York Stock Exchange and Nasdaq - are contemplating to merge. What do these merger suggestions signify? For one, these are the reflection of rapid changes on the information technology front. For another, these are also indicative of the need to grow big not only to take on competition but also serve a larger client base at an economical cost. The myriad Indian bourses may have to take a cue or two from what is happening across the shore.

Like in the U.S., in India, too, the stock market has been in the grips of two premier exchanges - Bombay Stock Exchange and National Stock Exchanges. Unlike in the U. S., there are several regional exchanges in India who came into being under a different era and, hence, had their own utility in terms of developing the secondary market for equities across the length and breadth of the nation. Now the situation has turned topsy-turvy for them.

A peep into the past will put things in perspective. Time was when the Bombay Stock Exchange ruled the Indian stock market like nobody else's business. That was when technology had remained a distant dream. This had made inter-connectivity impossible. Hence, the authorities had thought it fit to permit the setting up of regional stock exchanges. This had indeed served a two-fold objective.

Firstly, it had facilitated people outside Bombay also to dabble in stock markets. Secondly, it had helped in widening the secondary market for equities. The absence of technology and the consequent lack of inter-connectivity had ensured that brokers in these exchanges thrived. Some who had links with BSE had indeed cashed in on arbitrage possibilities.

Much water has flowed under the bridge since then. The advent of the National Stock Exchange (NSE) on the scene has brought about a sea-change in the Indian stock market. Laying much store by technology, the NSE set out in a systematic way and expanded all over the country using VSATs (very small aperture terminals). If the regional bourses survived because of the absence of connectivity, the NSE had sought to provide the missing link. A technology-savvy NSE is today the numero uno of the Indian stock market. What followed was a BOLT (Bombay Online Trading Terminal) from the blue for regional exchanges. With technology bringing NSE and BOLT to the nook and corner of the country, the regional bourses are finding themselves in a jam. When the market collapsed in the wake of share scam, it only had helped to worsen their plight. Indian bourses originally were dependent on listing fees from corporates to eke out their living. When BSE and NSE began collecting fees based on turnover, smaller ones too have to fall in line. With business moving away to these premier bourses, the regional exchanges are financially weak.

What does the future hold for these exchanges? If anything, the future looks grimmer for them. What is the way out? Over a period, we can surely see a consolidation of the sort happening in the corporate world to occur in the Indian stock market as well. In fact, these smaller bourses are beginning to realise their diminishing role in a liberalised technology-driven economy. Reports suggest exchanges like Bangalore and Kochi are proposing to become members of big bourses like BSE and NSE. Nearer home, the Madras Stock Exchange has just announced its decision to float a subsidiary which will be sub-broker for UTI Securities which has BSE and NSE cards.

On the face of it, these exchanges could do very little, given their financial constraints. It is indeed natural for them to look for ways and means of beefing up their income. The decision of MSE to let the proposed subsidiary to turn a sub-broker for UTI Securities give a clue or two to its financial constraint. Picking up BSE or NSE cards would surely cost the MSE subsidiary very much. Hence, it has chosen to adopt a prudent course. The other exchanges, it appears, have opted to become members of big bourses.

What all these portend? Sooner or later, a stage will come where regional exchange either die a natural death or become appendages to bigger bourses - BSE and NSE. No doubt the survival threat has forced many of them to look for some form of association or the other with the big bourses. With broking becoming a resource- intensive business, this should go a long way in helping the cause of the regional brokers. There is, however, a danger in this. Now that they are given the opportunity to trade on bigger bourses (because of alliances between bourses), brokers of these regional exchanges may tend to focus less on local bourses - resulting in shrinkage of business to the regional bourses. That could spell further trouble for these exchanges.

What should they do to stay afloat in a competitive environment where technology has brought down geographical walls? Probably, they could end up being affiliates of either of the two big bourses. Their experience, built grossly on local knowledge of corporates and brokers, can still be tapped. Perhaps, they can still exist as some sort of clearing houses for the big boys. Associating with these exchanges should help even the bigger one's. For, this will enable them boost volume, exercise greater control over corporates and brokers, solve speedily investors' complaints and bring about economies of scale in operation. More than anything else, it could bring about distributive justice to the business of FIs and FIIs, much to the relief of regional bourses.

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