Bolt From The Blue

On December 20 and 21, chiefs of 22 regional stock exchanges and representatives from SEBI sat huddled in a meeting in Bombay. BSE President Kamal Kabra chose the occasion to make a dramatic announcement: that his exchange would expand its computerised trading net-work to other cities, irrespective of whether the SEBI approved its plan or not. "This is a free country, isn't it? If you want to build another Taj Mahal in Hyderabad, aren't you allowed to do so? So why should anyone have any objections to BSE starting branches in other cities?" he was to quip later.

Kabra's announcement came as a bolt from the blue to many stock exchange chiefs. In effect, the expansion of BOLT means that BSE brokers will have associates in other cities (probably local brokers), whose computers will be linked to the BOLT network and trade on the BSE can be carried out from any part of the country. Greater liquidity on the BSE results in higher volumes. For instance, the value of traded scrips on the BSE during 1995 touched Rs 42,063 crore, while on the Delhi Stock Exchange (DSE)—the second largest regional exchange in the country—it touched a mere Rs 9,198 crore. This higher volume results in scrips commanding higher prices on the BSE. Given the option, the investor will thus prefer to trade on the BSE than on his regional stock exchange. This threatens to put the smaller stock exchanges virtually out of business, akin to what happened in developed stock markets around the world when computerised trading was introduced.

This decision of the BSE is also a direct challenge to the very concept of the NSE. Not only is it the only other computerised bourse, it is also the only exchange to have dedicated trade terminals spread across the country. The BSE is thus attempting to duplicate the NSE and it will be up to the investor to pick his bourse.

At the meeting where Kabra made his announcement, the BSE was surprisingly supported by the NSE, DSE, the Over the Counter Exchange of India (OTCEI) and another unidentified stock exchange. But the other 17 stock exchanges expressed their disapproval of the BSE's plans. Though the Madras Stock Exchange (MSE) has not taken an official position, brokers at the exchange are characteristically quick to turn this into a north-south issue. Says a broker at the MSE: "The equity culture is finally picking up in the south and most of the family-owned and closely-held companies are coming out with public issues. BOLT will give them a jolt and the inherent fear of the northern predators taking over their precious possessions gets strengthened by this move."

Besides, the BSE decision has also caught the SEBI napping. Under Section 13 of the Securities and Contracts (Regulation) Act, stock exchanges are allowed to carry out trading only within the municipal limits of the city. In other words, trading on the BSE can only be carried out within Bombay. This was fine before the BSE became computerised. After computerisation, the technology makes it possible to trade on the BSE from anywhere. All you need is a modem so that your computer can talk to the BSE's computer. And so, while SEBI Chairman D.R. Mehta was not available for comments, he sure has a problem on his hands.

Kabra, however, is sure that the BSE is not violating Section 13. "As far as the legalities involving Bombay municipal limits are concerned, don't forget, BSE is just a name. Does this mean that if we call this exchange the Universe Stock Exchange, we can open branches on the moon?" he argues.

Courtesy the availability of this technology and keeping in mind the NSE challenge to BSE's supremacy, the Bombay bourse drew up a plan to set up extension counters across the country. The BSE point of view is that the setting up of extension counters does not contravene Section 13, since the contract for the sale or purchase of shares will finally be entered into within the city limits of Bombay itself. The extension counter will merely transmit the order over the computer to the broker's Bombay office which will, in turn, enter into the contract in Bombay itself. Influential SEBI officials admit privately that the BSE is on very firm legal footing. After all, the NSE also operates from more than one centre. In fact, the BSE had written to SEBI asking them how the NSE was being permitted to trade across the country, while the same permission was being withheld from them.

The BSE had submitted its plan to the SEBI, along with a favourable legal opinion from its solicitors. It then awaited the SEBI's official go-ahead. It never came. Tired of the endless wait, the BSE eventually decided to take matters into its own hands and its president Kabra chose the meetings held on December 20 and 21 to make his stand on the issue clear. "We are going ahead with our branches in other cities," Kabra told Outlook later. According to him, the decision to expand lies totally with the BSE and that the SEBI doesn't have a say in the matter. "We don't require permission from anyone, not even the SEBI. There is no provision in the laws of the land which can prevent us from starting BOLT systems in other centres," he affirms.

NSE Managing Director R.H. Patil, however, disputes this view. Says he: "It is the SEBI which has to decide whether BOLT terminals can be set up at other centres. The ultimate responsibility lies with them." While SEBI has officially kept silent on the legality of BOLT's expansion, privately officials are of the opinion that regional stock exchanges will not allow the BOLT expansion to go through and will drag the matter to the courts. They feel that it may take a long time before the matter is settled.

To this, Kabra has a ready retort: "Let them go to court, there is no way we will not be allowed to open branches in other cities. If you don't allow us, forbid the NSE from operating in more than one centre."

The legality of the whole issue apart, there are some who would actually like to follow in the footsteps of the BSE. For instance, the DSE has already indicated that it would also like to expand its operational area. DSE trading is scheduled to go on-line on January 25 and the exchange is of the opinion that it will be in a position to gain business from big towns in north India.

Although most observers are sure that the small exchanges will be hit badly, others differ. Says a leading broker in Madras: "Scrip prices are slightly lower on the MSE than on the BSE. This will lead to a piquant situation where buyers will use the MSE and the sellers BOLT. While this is already happening, it will be greatly increased if there were to be BOLT extension counters in Madras. One has to wait and see the long-term impact of such a skewed arrangement."

 Stockmarket observers have another valid point of view. What is more important, they ask: the success of regional stock exchanges or better returns for the investor? After all, the regional stock exchanges have relatively lower scrip prices and will also find it tough to compete with the relative professionalism of the BSE. Therefore, they say that investors will be better off trading on the BOLT than on regional stock exchanges. However, opponents of the BOLT expansion say that it is better to deal with unprofessionalism than with the monopoly Bombay brokers will have in case BOLT's expansion comes through.

There are also some sceptics who feel that setting up the BOLT network across the country will be so expensive the BSE will simply not be able to do it, despite all its grandiose plans. Kabra hotly refutes that, stating that the BSE will be investing Rs 15 crore to set up a VSAT master station in Bombay and each subscriber will have to pay Rs 5 lakh to enter the system. Says he: "The apprehensions about prohibitive costs are fears being spread by the detractors of the BSE proposal."

No matter how strong the opposition or how prohibitive the cost, it seems that the BSE is hell-bent on making money from size and technology.