BOOK EXCERPT: Revisiting the beginnings of the BSE vs NSE battle

An excerpt from Moneycontrol Editor Santosh Nair’s book Bulls, Bears and Other Beasts that revisits the fierce rivalry between the two stock exchanges that began in 1994.NSE’s arrival on the scene as a competitor to the BSE dramatically changed the way business was transacted. There was no dearth of stock exchanges across the country at that point, but BSE was by far the biggest and most important of them all. It had the maximum number of companies listed on it, and was more liquid compared with its peers. Calcutta Stock Exchange came within respectable distance of matching it in terms of liquidity, while the Delhi Stock Exchange was a distant third.

While many retail investors in far-flung towns preferred to transact on BSE, they invariably ended up getting poor prices because their orders would be routed through a chain of sub-brokers to the main broker in Mumbai.

Mahendra Kampani, when he was president of the exchange, tried hard to computerize the trading process and convert the open outcry system into a screen-based one. With screen-based trading, brokers could put in their orders on a trading terminal from the comfort of their offices. The advantages of electronic trading were twofold. One, liquidity would increase as more investors could simultaneously access the system. This would shrink the spreads (difference between the buy and sell quotes) dramatically. More importantly, there would be greater transparency about the prices at which shares were actually sold or bought.

The move would have been beneficial for investors, but it would have also dented the profitable businesses of many jobbers and brokers who thrived on the wide spreads and opaque prices resulting from low liquidity. In fact, the majority of the jobbers would have been rendered redundant.

Not surprisingly, Kampani faced huge opposition from the broking community, and the proposal was put in cold storage. What the broker-jobber lobby did not realize was that in blocking computerization, they had dealt a crippling blow to BSE, a blow from which the institution would never really recover.

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Had BSE opted for computerization at that stage, NSE would have had to work harder to snatch market share from it. I cannot say for sure if BSE would have been ahead of NSE had it computerized its systems earlier, because the BSE continued to score self-goals even after the NSE had started nibbling away at its lunch.

Years later, when I met up with a veteran BSE broker who had once been a president of the bourse, he told me how the exchange’s electronic trading plan never got the backing it should have from the government. In fact, it appeared as though some influential people in the government had resolved to marginalize BSE.

My own view, which many old-timers also agree with, is that somewhere along the way, the BSE brokers’ lobby had become too powerful for its own good and was beginning to be seen as a challenge to the government. In the late 1980s, when former UTI chairman Manohar Pherwani—the original Big Bull of the Indian stock market—tried to get a broking card for a UTI subsidiary, he was denied it. UTI did huge business with the brokers and was aware that it was being regularly fleeced on quite a few transactions. Large deals would be leaked and the prices it got on many trades were far from satisfactory. To get around the problem, UTI decided to have its own broking card. But the big boys of

Dalal Street would have none of it. One, the brokers who made a living off UTI’s deals would lose a big share of the business. Two, giving membership to UTI would lead to similar requests from other institutions too. It is said that Pherwani was incensed, but there was little he could do.

Some other institutions too tried requesting for membership, but they too were snubbed.

When the newly established SEBI tried to get brokers to register with it for a fee, the proposal was stoutly opposed by brokers and jobbers. They refused to carry out transactions, with the result that BSE had to be shut for a week in April 1992.

Finance Minister Manmohan Singh, who visited Bombay during that time, came down to BSE to meet the agitating brokers. I was told by friends that the brokers behaved badly with the finance minister, shouting slogans and booing him.

This must have piqued the government, which was in the midst of rolling out the red carpet to foreign investors to get them to invest in the stock market. The leading exchange of the country holding the government to ransom would have only served to drive the investors away.

Thus it was that NSE, set up with financial institutions as its principal shareholders, and originally meant to be a trading platform for wholesale debt, was given permission to start an exchange for trading in shares too. It commenced operations in November 1994, overnight changing the rules of the game. Incumbents like BSE had no choice but to follow suit or risk becoming obsolete.

While their core business was the same—bringing together buyers and sellers of shares—there was a marked difference between the business models of NSE and BSE.

From the first day of its operations, NSE started operations with an electronic trading system. It would take a few more months for BSE’s computerized system to become operational. NSE followed a weekly settlement cycle, just like BSE, but unlike on BSE, trades on NSE could not be carried forward. On settlement day, trades had to be either squared up or settled.

The NSE was run by professionals and did not have even a single broker member on its board. In comparison, the BSE’s governing board was packed with brokers, and the officials in charge of operations complained of frequent interference by influential brokers. Above all, the NSE’s big advantage over the BSE was its pan-India reach, offering services across the country. The BSE had to wait for some months before it could expand beyond Bombay. That head start made quite a difference, as the NSE had already made a mark for itself in many of the smaller towns by the time the BSE came calling.

Also, the closed club culture of the BSE only worked to the advantage of the NSE. The number of membership seats, or cards, as they were called, on BSE was limited. Anybody aspiring to become a member had to buy a card from an existing member. This arrangement helped keep the price of the membership card very high because there were very few sellers.

At the peak of the rush for BSE membership, ING Barings bought a seat for a whopping Rs 4 crore. Never was a BSE card sold for anywhere close to that price ever again.

As much as they derided the NSE in public, many of the large BSE brokers privately applied for membership on the NSE. They wanted to hedge their positions. They were convinced that the NSE would flop, but just in case it did well they did not want to lose out on clients.