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PUT OR CALL?

142 years after taking roots under a banyan, Asia’s oldest stock exchange hits the capital market today

By Manu Balachandran

India’s largest and Asia’s oldest stock exchange is itself set to debut on the bourses.

Today, BSE, earlier known as the Bombay Stock Exchange, will hit the capital market with its initial public offer (IPO)—the first by any Indian stock exchange—looking to raise over Rs1,240 crore. The shares will be sold in the Rs805-806 price band.

BSE is the world’s largest stock exchange in terms of the number of listings, with over 5,900 companies registered with it. It is also the world’s 10th-largest by market capitalisation, which currently stands at around $1.7 trillion.

The funds raised through the IPO will go to the 9,000-odd existing BSE shareholders, including the Singapore Exchange, the Mauritius-based arm of American investor George Soros’s Quantum Fund, and the foreign fund Atticus. Together, BSE will dilute stake worth 28%.

The shares will be listed on the National Stock Exchange (NSE) as India’s market regulator, the Securities Exchange Board of India (SEBI), does not permit self-listing for an exchange. The NSE, which boasts bigger trade volumes, too, is preparing for an IPO to raise some Rs10,000 crore.

“We have been looking to list BSE for the past 10 years,” BSE CEO Ashish Chauhan said on Jan. 17.  It didn’t happen mostly due to SEBI regulations, which have since been relaxed.

Humble beginnings

BSE began operations on July 9, 1875.

However, much before that, for nearly 40 years, the city stockbrokers worked under banyan trees, first under one at Horniman Circle in south Bombay (now Mumbai), before shifting to the Meadows Street trees just a few hundred metres away. The growing popularity of stock broking and trade meant that the brokers’ crowds would often leave the roads clogged. So, by 1874, they decided to move into a building of their own.

Some 25 stock brokers pitched in with Re1 each to form the Native Share and Stock Brokers’ Association in 1875. The association rented a floor of the Advocate of India building on Dalal Street—a dalal is a broker—at Rs100 per month. As the name suggests, only native Indians could join the association.

However, they struggled to pay Rs100, a huge amount in those days. So, Dinshaw Maneckji Petit, founder of India’s first textile mill, came to their rescue. Petit, whose daughter Rattanbai, or Ruttie, was married to Mohammed Ali Jinnah, the future founder of Pakistan, owed money to some of the brokers. In lieu of that debt, he bequeathed them 25 shares of his firm.

“Subsequently, those shares were sold at Rs690 apiece. Of the Rs17,250 thus raised, the association repaid Maneckji Petit the Rs2,393 he had (earlier) advanced to it,” Sameer Kochar writes in his book BSE: Journey of an aspiring nation. “The balance amount, Rs14,857, provided the initial capital with which The Native Share and Stock Brokers’ Association started work.”

In 1899, the group had moved into a new building, the Sir Dinshaw Petit Native Brokers Hall. Meanwhile, the establishment of a stock exchange in Bombay saw other Indian cities following suit—Ahmedabad in 1894, Calcutta in 1908, Madras in 1937, and Hyderabad in 1944.

It was only in 1980, though, that the BSE finally shifted to its current home, the Phiroze Jeejeebhoy Towers in south Bombay, just metres away from Horniman Circle.

Popular Sensex

Today, Sensex, BSE’s benchmark index, widely serves as an indicator of India’s economic health. Created in 1986, it comprises 30 of the largest and most actively-traded BSE stocks. Other key BSE indices are BSE Finance, Energy, Infra, Smallcap, Midcap, and FMCG, among others.

However, a chunk of the BSE’s revenue comes from providing listing fees for corporates and mutual funds for the BSE platform, and by selling market data. BSE also earns a substantial amount from investments and deposits made in bonds, mutual funds, and bank deposits.

Over the next few months, it is set to receive between Rs200 crore and Rs250 crore when it sells stake in the Central Depository Services, a BSE subsidiary and one of the two depositories in India that help investors hold securities in electronic form.

However, over the past few years, the NSE, which was set up in 1992, has eaten into BSE’s pie and now has a market share of 85% in equity cash trading, 94% in equity derivatives, and 59% in currency derivatives for 2015-16, according to the Oliver Wyman report. Much of NSE’s success has been attributed to its better technology and products.

In fact, today, BSE’s reach is “so diminished that it actually makes a loss on its core operations, compensating for it from its investment income, which is 29% of revenues,” according to Value Research, a New Delhi-based equity research firm.

In the last five years, its revenue has grown at a compounded annual rate of 5.8% while profits grew 4%. In 2015-16, BSE’s total income stood at Rs658 crore, while net profit was Rs122.5 crore. BSE isn’t worried, though. “While we need to work on increasing market share in some products, we are in the compliance business and that has to be on the top,” CEO Chauhan said. For instance, the company delisted 250 companies from its platform last year after they were suspended from trading for more than a decade.

Meanwhile, India’s underexploited equities market is expected to boom. Equities as an asset class for investment still has a very low share in India at about 5%. In comparison, it is 14% in China and 20% in Brazil.

“India’s favourable demographics is a major strength of the economy, especially as the working age (15-60 years) group constitutes more than 60% of the overall population,” brokerage firm Geojit BNP Paribus said in a report (pdf). “With a growing young population, more investors are expected to enter the market in the coming years.”

As India’s preferred options for investment change, partly due to prime minister Narendra Modi’s recent move to demonetise some currency denominations and the subsequent control over financial transactions, experts expect more activity in equities.

All that could mean that investors might line up for BSE’s IPO. A ”put” or “call” can determine the veteran’s future.