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BSE CEO Ashishkumar Chauhan Says Time For T+1 Has Come

Across the world there’s an understanding among regulators that T+1 is now feasible, says BSE's Ashishkumar Chauhan.



Ashishkumar Chauhan, MD and CEO of BSE stands for a photograph at the India International Exchange in GIFT City, Gujarat. (Photographer: Dhiraj Singh/Bloomberg)
Ashishkumar Chauhan, MD and CEO of BSE stands for a photograph at the India International Exchange in GIFT City, Gujarat. (Photographer: Dhiraj Singh/Bloomberg)

A shorter trading settlement cycle proposed to be implemented from 2022 is bound to happen even as there’s some resistance from the market, according to Asia’s oldest bourse.

Across the world there’s an understanding among regulators that T+1 is now feasible, Ashishkumar Chauhan, managing director and chief executive officer at BSE Ltd., said in an interview with BloombergQuint. It reduces the risk in one portion of the market today — the spot or secondary market, although it’s very small compared to the risk in the derivatives market, he said.

This (T+1), according to Chauhan, is a larger milestone undertaken together by global regulators. They have all come to the conclusion. “In fact, the U.S. is pushing for T+1, many other countries are also trying for T+1. That’s why even SEBI is trying to do T+1. So if not today, tomorrow India will have to participate in that kind of flow.”

Earlier this month, the Securities and Exchange Board of India said the exchanges can offer T+1 or the already existing T+2 rolling settlement cycles from Jan. 1, 2022. But certain market participants are reluctant to adapt the T+1 option.

Markets, according to Chauhan, will always resist till the time they can resist. “For me, the regulators have a perspective, they jointly decided across the world what needs to be done. They pace it in some practical way,” he said.

Ours is a very pragmatic approach. So they (SEBI) have given the choice. The pace will be determined by the success we get initially.
Ashishkumar Chauhan, MD And CEO, BSE

Technological Disruptions

According to Chauhan, brokerages will have to diversify away from trading to leverage customers and technology.

The fact is that the value a brokerage can derive from incisive trading or infinite trading is very little, he said. “They will have to go into distribution, they will have to go into other products for them to have broad-based revenue streams and that’s what any right-minded brokerage or their financiers at some stage will do.”

Brokerages, he said, will have to derive value from customers, something which the new, young fintech brokers are doing — they have become the largest distributors of mutual funds and are now setting up their own mutual funds as well.

Fintech and tech platforms like Zerodha and Paytm are not only disrupting the trading arena with discount broking but also leveraging the customers to derive distribution income. Both of them are even in the process of starting their own mutual funds.

“Once you have the customer you can do a lot with the customer and many more value added features,” he said, adding the new fintech brokerages have been able to leverage technology brilliantly.

For me, technology is the only change that happens in the world. The rest of the society surrounds it and that has been proven in the stock market more starkly in the last 25-30 years. You can see most of the exchanges in India which were traditional closed down and couldn’t keep pace with the technology and that is true with the brokerage houses.
Ashishkumar Chauhan, MD And CEO, BSE

Value Unlocking

The BSE is looking to unlock value from its intellectual platforms such as BSE Star MF platform. The company’s board has approved demerging BSE Star MF, and is exploring strategic partners to invest in it.

While the board has provided the nod, it isn’t currently in any active discussion, Chauhan said. “The BSE is not able to get a valuation that some of the fintechs are receiving,” he said. “BSE Star MF is one of the largest trading platforms for mutual fund transactions and is profitable.”

Watch the full interview here:

Read the edited excerpts from the interview here:

We saw the Sensex crossing the milestone of 60,000 on Friday. It's a big momentous occasion for all of us although the index crosses many milestones. In your experience in the last two, to two and a half years, when we have seen a lot of participation coming from retail and various cities, what is the trend that you are picking up with respect to equity markets?

ASHISH CHAUHAN: There is a clear interest in the stock market now and literally, we are getting close to one lakh new investor accounts every day but that doesn't mean we are getting new investors because investor accounts are actually the broker and it's possible that one investor may have accounts with even one or two brokers instead of only one broker. So that's where there’s a slight double counting, but effectively the pace of change has been almost 60%. One and half years back we had close to five crore investors, today, we have about eight crores. So, effectively three crore investors in one and a half years vis-à-vis five crore in the first 145 years is a large chunk almost 60% in a very short time and that tells you that retail investors across the country from a very early stage, which were not on the investment map, also started coming up even from Lakshadweep, from Andaman, Manipur and from Jammu Kashmir and some of the northern states which were not so great in equity investments—earlier only Maharashtra and Gujarat were the two centres for investments but today, most of the pressure is coming from Uttar Pradesh and the northern states. So, in a way, you can see that the equity cult is actually expanding, and I think somewhere it's broad basing in the overall framework also.

What is fuelling this kind of broad basing which has happened? Is it because in last one and a half years, we have seen a lot of people from cities moving back to their hometowns and they're working out of there and so we are seeing new registrations coming up from there being a part of that, or is it the new generation that wants to participate in the equity markets?

ASHISH CHAUHAN: I think both are true. One is that young people are also coming in large numbers, which was not true early on, they're also telling their parents to get investments in equities. One of the reasons is, I think, very low fixed deposit rates. They are easing across the world, so it forced India to reduce the interest rates and that has basically ensured that some of the retirees are finding themselves in a difficult situation in terms of the interest they earn out of their their fixed income. Whereas the stock markets, the equity market have given tremendous returns so that's where many of them are also trying to hedge by investing into the equity market. Of course, there is also a consistent flow from the EPFO too with 15% incremental coming into the ETFs. So, I think these are the many reasons, why stock markets have given returns and why so many more people are coming into the market. The third part I think, which I think has enabled if not fuelled is this number of investors coming in, is the automation. Now, earlier, for a broker to open an office in a small town, it would have costed him so much, so it was not viable to do things. But now with the mobiles, there are brokers with very few offices but are having a huge amount of trading and a huge number of customers just because they're able to do e-KYC, get them on board, on exchanges and BSE particularly has a very large franchise of the mutual fund distributors. So, a large portion of BSE’s investors are also investors in mutual fund but aren’t necessarily direct traders or direct investors in equity. So, because of BSE’s broad-based investment related portfolio, we see a very large chunk coming in due to the mutual fund industry too and not only due to the stock investment or the direct part.

I was speaking to one of the CEOs of the mutual fund one of the top five, who is coming out with an IPO and I asked him the same question, equity market was able to attract really two and half to three crore of new investors but we didn't see that kind of new or unique investors coming into mutual funds. At one point in time he used to say that any initiation into the stock market should come through mutual funds because there is a risk involved coming directly vis-à-vis coming through mutual funds. Why do you think the mutual funds got left out and the equity market was able to live?

ASHISH CHAUHAN: Now, BSE never had a negative sort of flow in mutual funds and today also the BSE does almost 35,000 crores a month of mutual fund business. A large portion of that is actually subscription-based. So, it is not correct to conclude that mutual funds have been left behind. In fact, of course, the stock markets are accelerating, they go up and down so much the youngsters who have a mobile phone at hand or their computers are able to directly participate but there are many more numbers of people who are attracted to mutual funds and rightfully as you rightly say it is less risky, more diversified, some experts kind of work for you on that, and so on and so forth. I think somewhere, the story is still about mutual funds as much as about the secondary market.

My point is not about the AUM that the industry is bringing up, I'm talking from a point of a unique investor, which is adding to the mutual fund industry. Last one year, when we saw two, two and a half crore of new investors come directly to the equity market, we haven't been able to see that kind of an addition of investors to the mutual fund industry. That is where I'm trying to figure out. I need your thoughts, where are mutual funds getting it wrong, that they're not able to tap the entire two and half crore of investors which are directly coming into the equity market and not into mutual funds?

ASHISH CHAUHAN: The secondary market will always be a superset because what has happened is, earlier, the mutual funds had a different channel of distribution. Today, the BSE StAR MF is pretty much the UPI of the mutual fund industry, everyone is basically there on StAR MF or coming into StAR MF at some stage. That's where I think whenever a broker registers or a distributor registers, actually the investor gets registered for secondary market as well as for the mutual funds and also for the primary market. That's where you think the secondary market has more investors but today the investor is able to move seamlessly between mutual fund as well as secondary market and I see many people are investing in mutual funds also and I think when they publish their reports on the new unique investors, I think it'll be equally good. It might be slightly less than the secondary market, because secondary market is the superset but I have no doubt in my mind that a large portion of push is coming from the distributors of mutual funds to bring the customers into the automated distribution model, which is the StAR MF model of BSE.

I wanted to talk to you in detail about the BSE StAR MF as well, because that's one of the key innovative platforms that you have established and it's doing very well for you, as an industry as well and you're the market leader there as well. So, tell me, how is it working in terms of performance? Are you looking at any strategic tie up for an MF demerging into a separate one and unlocking value for BSE?

ASHISH CHAUHAN: We had announced that also that our board had approved a strategy tie up almost a year back, but we have not found any specific proposals which is kind of worthwhile for us to pursue and that's where we currently are. So, we continue to look at any options that arises but currently, it is growing 80-90% year on year, in terms of number of transactions for the last 10 years and even this year is no exception. In fact, it's grown very rapidly and so we thought once the base becomes larger, the growth cannot be so high but we are also pleasantly surprised at the kind of number of people, number of distributors and the number of investors joining onto the StAR MF bandwagon. That is amazing and some of the top names of the mutual fund distribution industry, banks and everyone basically think that now, this is the de-facto infrastructure, and the charges are also so little compared to any compact platform for the mutual funds themselves that everyone thinks, why not?

How do you value such a platform because if you look at BSE as a market cap, it's low but if you look at some of the paths, many of them have not been fully valued by the market and that's the reason I was asking whether unlocking of some of the paths will help unlocking value for BSE? How are you valuing the BSE StAR MF platform?

ASHISH CHAUHAN: I agree with you fully and I think we have discussed this even five years back also, and you are right to point out then also that there is an anomaly in BSE’s market capitalisation vis-à-vis what the assets are and the real assets, as well as the kind of valuable IPs and markets that are there. That time also, I couldn't give you more of a detailed answer and even today I say that the platform which is going to do literally the largest amount of distribution, if it was a standalone company, it would have been valued at very large amounts.

Give me a ballpark range, because I think it should be valued somewhere like a FinTech company, in that entire platform. So, what could be the range that you can look at?

ASHISH CHAUHAN: Sitting in BSE, which is what I call conservatism that has sort of been applied and also being a CEO of the company, I wouldn't want to hazard a guess but if you are in Bengaluru, with some sort of high-tech names, BSE today is collecting or giving an almost close to 3,60,000 or 4,00,000 crore rupees worth of mutual funds in a year which is phenomenal compared to any other you might have heard of in any other FinTech. It's profitable, it's not even loss-making or it's not burning money. One of the reasons is, probably it may not be valued so that’s why it's profitable. There are probably other reasons I'm not able to explain but ultimately, you have to accept what the market gives you.

But it is also about asking the market as well, right? It is an entity which is profitable, and it is almost a transaction based FinTech company. So, what could be the base valuation for it?

ASHISH CHAUHAN: It would be difficult for me to hazard a guess but anyone who is able to value some of the new FinTechs, I'm sure you ask those people—the private equity guys and they might be able to tell you. Probably they might tell us to burn more but otherwise, I think, broadly the story and the performance remains and in the long run, coming from a very conservative way of life, I think finally, you have to be profitable.

I know at some point of time, BSE was in discussion with some London based investors for StAR MF platform. Is it still going on, the discussion? Or is there now no discussion at all?

ASHISH CHAUHAN: Currently, there is no discussion but if any opportunity arises, we are open to that. Our board is open to that they've also told us that if they can create value for the shareholders, why not? But our main job is to run the exchange and run our operations well. We’ll continue to do that.

Another thing is about the SME market platform that's also doing well for you, you have a lot of SMEs who are registering there. How's that platform doing for you?

ASHISH CHAUHAN: Again, it's a very interesting platform: 347 companies got listed, two of them got listed today. Today, we have 347 companies we have raised close to 3600 crore for them over the last eight nine years and their market capitalisation is close to 36-37,000 crore. So, effectively even though SME companies, even we started a start-up platform for young companies which want raise one crore to two crore, today we are now 11 companies listed on the start-up platform also.

So, effectively we think that India's future is in investments even more than trading. Wealth creation is not the same as infinite liquidity. You can literally have a situation where you can have infinite liquidity and no growth or no profit growth. Also, you can have a situation where you have a little and reasonable liquidity, but very huge growth in profits and for me, that is what sometimes the markets, even the media starts sort of creating synonyms out of liquidity versus wealth. Both are kind of orthogonal. If you have liquidity, it's good but beyond a point the liquidity is not wealth creation, right? So, for me, I think BSE is always trying to create wealth for India for last 146 years since it has been existing. It has helped India create $3.6 trillion of wealth now, that's more than one-third of India's wealth. It is out of trust, right? That's not because you trade a lot. Of course you should have a little bit of trading, but just the pure focus on trading for me, takes away from the essence of stock markets. That's able to raise funds, create wealth for entrepreneurs, for investors for society and jobs, and so on and so forth. That's where BSE focuses.

One of the biggest challenges with any of the companies are facing in the stock market is a FinTech challenge, which is coming in. Five years ago, if you looked at the top brokerages, it would have been traditional brokerage houses. Today, if you look at it, it's all FinTech companies. At least the of the top five, four will be FinTech companies who are doing that. How do you see this disruption, changing the way people invest and the brokerage then going forward? Because you have a vast experience of the entire capital markets. So, from that point of view, how do you see this changing the way things have happened?

ASHISH CHAUHAN: Five years back, 10 years back we both talked about similar issues and factors. The value which a brokerage house can derive from incisive trading, trading infinitely every day, is very little going forward. They will have to go into distribution, they will have to go into other products for them to have broad based revenue streams. That is what any right-minded brokerage house or their financials at some stage will want to do that because today, trading is the name of the game and you get the customers but at some stage, you'll have to actually have some value derived for you also, as a company. That's where I think slowly, everyone will realise and many of them, I know they're trying some of the top young brokers, the new FinTech brokers are also some of the largest distributors of mutual funds and so that is happening in some ways too. They are also trying to set up their own mutual funds now, they're also getting to distribution of insurance and so on and so forth. I see them having some strategy of their advisors, telling them to diversify once they’re a customer then basically you can do a lot with that customer and give many value-added features to them. That is what I see all of them to be doing.

Do you think they’ve been able to leverage much yields using technology, as compared to the traditional brokerage houses?

ASHISH CHAUHAN: Brilliantly. For me, the technology is the only change that happens in the world. The rest of the society surrounds it and that has been proven in stock markets even more starkly over the last 25 or 30 years. You can see most of the exchanges in India, which were traditional, they closed down and couldn't keep pace with the technology and that is true with brokerage houses too. Even you started with that saying the traditional brokerages have not kept pace with the technological shift and also the expansion of the universe, in terms of the number of investors being serviced across the geography going into hinterland and that requires hard work, and a leap of faith, which many traditional brokers didn’t probably have. Some of them did have, and some of them have done really well, even if they were traditional brokers. I don't see the old versus new, it's more about who adapts to the technology, and also the changing scenario in a rapid way and that's how I would put it. It’s not new versus old.

Is it also leading to a slowdown of adoption of new products, or new systems as well? I'm talking from a point of view, like a T+1 system, where the regulator had given the option to the stock exchanges. Technology can do whatever, you can connect it, you're a tech person yourself, you know how technology can connect through blockchain and others do all the work but some of the old brokers were not able to adopt technology which will be objecting to moving towards T+1. What are your thoughts on it? As an exchange, what do you think of T+1 going by? Do you think by next year or early next year, you would be able to start that?

ASHISH CHAUHAN: I think this kind of larger milestones are done internationally together by regulators, like monetary easing currently is a fact across the world not only in India or the U.S., because they actually do coordinate those central banks. Similarly, many of the securities market regulators also do coordinate. So, across the world that seems to be an understanding among regulators that T+1 is now feasible and probably, if you can reduce the time to settle, it reduces the overall risk in one portion of the market today, which is the spot market or the secondary market, although it is now very small compared to the risk which is there in the derivatives. In many areas like even in derivatives, you end up paying often margins. So, it's not a big deal to be settling post-facto instead of paying margins up front, and that's where probably they’ve all come to conclusions. The U.S. is already trying to push for T+1.

Other countries are trying to push for T+1 because that's where I think, SEBI is also wanting to do T+1 because if not today, tomorrow, India will have to participate in that kind of a flow and India has always been a thought leader over the last 30 years in stock markets-related technological enhancement related things. We're doing weekly settlements in 1994-1995, which became T+3 then became T+2 and that wasn’t with the rest of the world. The rest of the world did not move then and the markets will always resist till the time they can resist right? All margins are being registered and all your depositories were registered, for that matter and many other things were registered too. So, for me, the regulators have perspective, jointly decided across the world—about what needs to be done, they base it in some practical way and that's how I look at it rather than trying to say our regulator is trying to go ahead no, it's actually that the U.S. regulator will announce that first. Ours is a very pragmatic regulatory approach, we provide a lot of time to people, do a lot of committee meetings and consultation and only then, SEBI takes a decision. Then they also try to come out with any changes in a very gradual way. So, they're given a choice of which stock to do and so it may happen but probably the pace will be determined based on what kind of success you get eventually.

So, you will be looking at T+1 in certain stocks, come next year in 2022?

ASHISH CHAUHAN: Yes, as and when SEBI wants it. In a way, BSE’s prime focus over the last 10-12 years has been that long. So, we are very good at any type of technological issues that come up. This is in a way, as you said, a technological issue from the exchange side, from the clearing house side, from banks, from depositories. So, all parts of the ecosystem have to be ready to achieve that and not only one exchange but one clearing house. Both clearing houses have to be ready for anything to be achieved in this kind of a coordination. So, we are pretty confident that we would be able to pull it through what is required but ultimately how the market takes it, how the regulator tells us the speed and so on and so that's how we will take it up from here on.

So, even if it’s in a small way, it will take off, but the expansion and speed would be something depending upon how market regulator wants to phase it?

ASHISH CHAUHAN: That’s correct.

Another thing you spoke about derivatives—that's something where you are trying to garner a big market share, what are the kind of products that you're bringing in so that you have a thriving derivative segment?

ASHISH CHAUHAN: In a sense, we are doing well in commodities, we are now the second largest commodities derivatives exchange, we are also doing well in currencies and so, those two derivatives’ markets are also in a way telling you that BSE’s technology is of kind of the top of the line in derivatives too. In equities, we do close to one to three lakh transactions a day which is not big, given that competition does close to one crore worth of transactions in most days. So effectively what I've been told is, we’re just 7-8% of the market share today which is early days, as I would put it but literally Sensex 50, Sensex 30 both are available on equity derivatives stock options or futures, they are available. We think we don't have the issues of prices changing very rapidly within intraday, that has been reported as fifth trades in the media. We are pretty confident about our technology now, as and when the market wants to trade we have Sensex 50 which is equivalent to the largest standing index and in a comparable sense, even the number, the difference is probably only 500-600 points. Of course, Sensex is the kind of barometer of the Indian economy. So whichever way, the market wants to trade, we are aware of the stock options or futures because the interoperability, you can trade on either of the exchanges and still have a set of net payment to be done on a margin basis or even for settlement. So effectively, we did all the background work, the tick boxes are done. Now, as and when, the market wants to trade, ultimately, it's up to them to do it. We can only provide all the facilities.

I want to check on the commodities segment because you have now, basically a universal exchange with equities, derivatives and commodities and within commodities, spot and derivatives where you can launch. Somehow the stock exchanges whether you or the NSE have not been able to make inroads into the commodities market that much as compared to the traditional commodity exchange like MCX or the NCDEX. Where are you on the commodities segment?

ASHISH CHAUHAN: We are now around 9% of the market and we are the second largest after MCX in commodities and I think what I've been told is that we have more than 70% market in the gold options, which is basically buying products and these are all delivery based products. There has been a change of stance by the regulator and rightfully to make markets less speculative, more useful, so that you are able to take delivery and give delivery. That is where the BSE pioneer, the stock options, as well as BSE pioneer commodities deliverable options come in and that's where I think we are getting good traction. We have also launched Sufi Steel, that is to do with steel millets and other things, and that is also getting good traction, we have of course jowar seeds, soybean, turmeric and so on and so forth. So, we are kind of going in a mix of agri-plus non-agri kind of a framework and we are getting reasonably good traction that in a short time, we have been able to go beyond the second largest exchange very easily and today, we do probably 3000-4000 crore a day of volumes and hopefully, we're able to do much better going forward.

As part of your expansion strategy, have you looked at merging with other changes like MCX? There was some talk at some point about merging with MCX, but nothing went forward and because there are no guidelines of merger of exchanges as such, but now that the markets are fully mature, if that doesn't make sense for the regulator to look at regulations with respect to merger of exchanges?

ASHISH CHAUHAN: In 1991, 1992 and even later on 1995, 1996 and in year 2000 also, there was a concept of NSMS, National Stock Market Systems and interoperability and so on and so forth. Finally, interoperability has come to India in a different way. Even merger of exchanges that was proposed in those days didn’t work out because of the way the stock exchange were set up. They were set up in a way of associations or persons. Now, probably going forward, anything is possible, but today there is no context within which we are actually discussing this. So, everything is possible but currently, we think we should be able to win the commodities game by ourselves because of the superior technology and similar distribution in commodities itself. Today we are eight crore investors, that is like very large and it's an understatement, I would say as compared to any commodities exchange. Similarly, the number of our members is pretty large compared to any commodity exchange, right? That's were we are giving the spread, in innovations we are bringing in spot, as you rightly said, to begin with, literally the Spot Gold Exchange is a push from BSE over the last seven or eight years that now, it’s now being allowed but at some point, it has been announced in the domestic part and we will be at the forefront as and when domestic exchanges or institutions are allow to start spot exchange in Gold. We think we are basically here to add value to what is currently happening and get our share of the market. That's how we were on a very long-term basis.

I was asking this because the regulator was also open to the idea of allowing more people to set up stock exchanges in the country. Do you see that there's enough of a wall for any new player to come in and establish there or is there enough room for more people to come in, into this market?

ASHISH CHAUHAN: For me, for a country, the size of India with it’s population, you can have many more things. America has more than 50 places to trade on. So of course, you can have that but if you call yourselves a stock exchange or an exchange, there is a regulatory structure that goes with that, including disaster recovery sites, investor services centers across the country, and so on. So, the cost of setting up an exchange and running it is very high. So, unless you achieve a minimum level of revenues, it will be a lot of burning of money for several years now, if not for decades. If somebody were to do that for 2, 3 or 5 decades going forward, like Amazon did in America. So, unless things change drastically, technology today doesn't cost much to set up but to run the way it is required to be run, with surveillance systems, all sorts of data warehouses, people which are employed by the organisation because it's a regulatory organisation so you are not supposed to outsource many things. So, keep data with you, have disaster recovery sites across the country, you have to have investor protection, investor awareness offices. So, all those things make it really costly to run these kinds of setups but who knows, people may be able to work this out.

My last question to you is about shareholders of BSE talking about value unlocking can happen for BSE. If you look at the market cap of BSE the CDSs take value and the reserves are almost matching to the BSE market cap and that's where investors are saying and this time we should do some unlocking on BSE so that it brings value to the shareholders because it has so much of IP properties and platforms, but they're not able to unlock value. When do you see that happening, is there a timeline that the board has put? Is there a timeline for you to do that?

ASHISH CHAUHAN: A lot of investors write to the board, there are even media reports coming in like yours. The board is acutely aware of this anomaly and they have given us the ability to come out with proposals which are fair and also workable because we are unlike any other normal commercial organisation, we are also a regulator and so we have to be very careful on trying to unlock value which may end up sullying the name and so that's when the board is also very cautious, but it is acutely aware and also sympathetic to this kind of value unlocking. So as and when it happens, we'll take up those proposals to the board and if the board approves we will execute it. Basically, the way it works is, today, more than 50% of board members are actually independent directors and they are very eminent people. So it goes through a lot of grinds before anything gets approved and rightfully so because BSE is not a normal company, right? It's not a normal commercial venture which can go and do whatever things it wants. It has to go through so many processes and so many approvals before, it is able to do what is, obviously, it is simple for many other companies. That's how I would put it and I will keep it at that as of now.