“Break NSE monopoly to reinvigorate Indian Capital market”

Says Society for Consumers’ and Investors’ Protection

It is observed that the Capital markets have definitely suffered from complacency of single company dominance and hence lack of development of segments beyond Equity. Stock exchanges have become a day trading and delta trading destination rather than a true platform for capital formation

The Society for Consumers’ and Investors’ Protection (SCIP) has undertaken a project to highlight certain concerns of the investors and address some of the issues that ail the stock markets in India. In these findings, the emergence of the NSE as enjoying a near monopoly and the corrosion of regional stock exchanges emerge as the key factors that prevent healthy competitive options being offered to the investors. The following findings of SCIP should not only be informative for the small investors but also act as a catalyst to the policy makers to take much-needed steps towards improving the stock market scenario.

1. The consolidated Profit after Tax (PAT) of the National Stock Exchange (NSE) for financial year ended 2009 is around Rs 700 crores. Its EBIDTA margin is around 74% and Gross Profit Margin (GPM) is around 67%. NSE has reported a stand-alone Profit before Tax (PBT) of Rs. 678.43 crores and Profit after Tax (PAT) stand-alone of Rs. 515.54 crores on a total income of Rs. 1,024 crores for the fiscal 2008-09. (See Annual Report 2008 -09)

A survey of the financial performance of corporate sector in general reveals that:

a) Only 23 Indian listed companies (of the total of over 6000 listed companies) have GPM of 67% and above, and

b) Only 49 Indian listed companies have EBIDTA margin of 74% and above.

Such super-normal profits lead one to conclude that the same can occur only in a monopolistic environment of the kind in which NSE operates and there is immense scope for drastic reduction in the transaction charges levied to millions of investors including common investor since NSE's revenue from transaction cost comprises 84.5% of its total income. Whereas we have observed that a part of these profits are paid out to the top brass of the exchange as part of their remuneration.

2. NSE top brass — Ravi Narain, MD and Chitra Ramkrishna, Deputy MD, earn gross salaries of Rs. 6.89 crores and Rs. 4.21 crores per annum respectively, which is believed to be the highest in the industry and comparable to the salaries of top 10 CEO amongst the Indian listed companies.

3. NSE's reserves of Rs. 2,700 crores (excluding the deposits kept by members) further gives it the strength required to consolidate its position to a near monopoly — a position, which gets further strengthened by a widespread misconception that it is a government company. Whereas the fact is that on none of the following parameters it can be compared with a government/ public company:

a. The profitability,

b. The salaries drawn by the top brass, and

c. The disclosure standards followed.

4. NSE has obtained a stay against CIC at the Delhi High Court for not being answerable under RTI by substantiating that it is a non-government private sector company and is therefore not accountable to CAG, CIC or Parliament. It is, therefore, under no obligation to:

a) file an Annual Report to Parliament

b) audit by Controller & Auditor General of India (CAG), and

c) RTI compliance

NSE is a non-government company and probably for the first time after 60 years of Indian independence, a private sector company is enjoying monopoly and super-normal profits in stock exchanges and consumers do not have any meaningful alternative. We have observed that an exchange, which is self-regulatory organisation, regulates companies that are listed on it. These companies are subjected to high levels of transparency based on the listing norms. An exchange like NSE is expected to have the same level of transparency and scrutiny as required of companies listed on it.

The table at the top of this page clearly reveals that NSE's majority shareholding comprise of foreign and private investors. A substantial chunk of the divested shares of public institutions has gone to foreign investors over a period of time. The supernormal profits arising out of the virtual monopolistic position of NSE is obviously benefiting the above shareholders at the cost of millions of common investors.

From point number 4 and 5, one can make some very interesting observations:

i) No filing of Annual Report to Controller & Auditor General of India (CAG)

ii) No RTI compliance and so no public accountability

iii) NSE is not listed and hence no public shareholder scrutiny; whereas all the major exchanges/banks of the world are listed. The NSE’s contention that self-regulatory role of an exchange being conflicted upon being listed is hollow as the best global exchanges are listed entities.

The table clearly reveals that NSE’s majority shareholding comprise foreign & private investors. A substantial chunk of the divested shares of public institutions has gone to foreign investors over a period of time. The supernormal profits arising out of the virtual monopolistic position of NSE is obviously benefiting the above shareholders at the cost of millions of common investors

Are the listed global exchanges, (NYSE, Nasdaq (New York), CME (Chicago), LSE (London), Deutsche (Germany), SGX (Singapore), Tokyo (Japan) & ASX (Sydney, Australia), not performing their self-regulatory role because they are listed and the fact that they need to declare results every quarter?

Do we want our exchanges to again depend on member's money and not becom independent corporate entities and raise resource on the basis of their own balance sheet (the very basis of demutualization)?

Do we want our exchanges to be non-transparent, not following rigorous corporate governance principles required of listed entities?

Is NSE concerned about public scrutiny which it will be subjected to because of listing?

iv) Without listing and with a cap on maximum shareholding as per government policy, it is not subject to any public shareholders' scrutiny.

Further, in the words of R H Patil, the founder MD and CEO of NSE, "the NSE has not satisfactorily achieved the purpose for which it was set up" probably due to the following reasons;

No depth in the market as top 100 scrips make up for 92% of volume compared to over 6000 listed scrips.

The bigger concern is that the entire Indian financial system is centered on only one private sector company, NSE, unlike other equally important sectors such as banking, telecom, insurance, aviation which have competition and mix of government, private and foreign companies because of which systemic risk is widely distributed

Poor reach of the market as 10 cities contribute to 90% of the volume. High operating cost, transaction cost and impact costs across length and breadth of the market.

Of the total daily turnover of Rs 1,00,000 crore on NSE, 70% is F&O and 70% of which is in Nifty index alone.

Of the total 16,000 contracts in F&O only 80 to 90 contracts (0.0001%) trade on any given day which makes the exchange very speculative.

Only about six lakhs unique client IDs trade on NSE, accounting for just 0.8% of the population.

No product innovation and no real capital formation is happening as more than 90% of the trading is cash settled.

It is reported that NSE spends only Rs 2 crores annually on education and awareness of Indian investors which is only 0.27% of their total profit of Rs. 750 crores.

Out of the 1,000-odd brokers at NSE, 25 brokers are reported to be doing more than 50% of the trading volume out of which a very major portion is from proprietary trading.

The bigger concern is that the entire Indian financial system is centered on only one private sector company unlike other equally important sectors such as banking, telecom, insurance, aviation which have competition and mix of government, private and foreign companies because of which systemic risk is widely distributed.

The NSE appears to be opposed to competition and the motivation for this also probably emerges from the profit-inked compensation structure of top managers of NSE who don't seem to have the same level of accountability that a PSU/government company or listed entity requires from their top managers.

It is observed that the capital markets have definitely suffered from complacency of single company dominance and hence lack of development of segments beyond equity. Stock exchanges have become a day trading and delta trading destination rather than a true platform for capital formation.

In the light of the above, the following questions need urgent debate from the point of view of the investing public of India:

1. What has been done to promote investment in securities in rural and semi urban areas?

2. What has been done to list more companies other than those who migrated from BSE and Regional Exchanges?

3. What has been done to promote capital raising and trading in the shares of SME companies which is a very critical sector from the point of view of employment as well as economic development? (OTCEI was in NSE's control but has completely failed) Given the lack of progress in this space and the failures of the past, the Regulator has once again put out a framework and called for RFPs for setting up SME exchanges/platforms after been urged by the SME sector as well as the concerned ministry.

4. What has been done to develop Bond market?

5. What has been done for implementing an effective method for borrowing and lending of securities?

6. What has been done to improve trading in interest rate derivatives?

7. How has NSE managed to remain a monopoly so far despite being a private sector company?

8. Why can’t cost of transaction to common investors and huge management and administration charges to brokers and financial institutions be cut down by half?