FIIs alone cannot decide Indian stock markets fate: BSE CEO
Bombay Stock Exchange CEO and MD Ashish Chauhan tells Money Today India's stock markets are a lot safer now compared to 20 years ago.
Bombay Stock Exchange CEO and MD Ashish Chauhan. Photograph: NISHIKANT GAMRE
Ashish Chauhan, Chief Executive Officer and Managing Director, Bombay Stock Exchange, tells Tanvi Varma that no single group, including FIIs, can decide the fate of Indian stock markets -
Q. How strong is the Indian stock exchange system compared to others?
A. There are various parameters on which exchange systems are measured. Retail investors want safety of trading, clearing and settlement systems along with safety of advice and strength of corporate governance. Internationally, people measure exchanges on many such parameters. However, in India, the tradition is to look at volumes, which may have some relevance for traders but not retail investors. In the last 18 years, our exchanges have achieved total automation and now offer a reasonably good response time, one of the best in the world. Clearing corporations have been set up to act as settlement guarantors (so that in case a broker defaults others don't suffer). There is real-time risk management. These make India's markets strong in terms of processing transactions. Now, we are going to the next stage of evolution. The regulations as well as the IPO framework have evolved. For instance, it used to take 30-50 days to list companies. Now, it takes seven to eight days. India's stock markets are also a lot safer now compared to 20 years ago.
Q. India's markets are highly influenced by foreign institutional investor (FII) activity. Do you think it's good or there is need for a better balance between foreign and domestic players?
A. FIIs, too, are investors in search of returns with a long-term horizon. In the last 20 years, since they have been allowed to invest, they have put in over $200 billion in India's equity market. In spite of this, 80% stocks are still owned by Indians, which makes them more influential.
India needs $1 trillion new investments over the next five years to just build infrastructure. This kind of funding is not easy considering that we save only 30% gross domestic product, out of which a large part goes into gold and real estate. Therefore, we need these additional funds from abroad. It also helps us manage our current account deficit. In fact, earlier, only FIIs (among foreign investors) were allowed to invest in Indian stocks. Now, even retail investors from abroad can do so. Further, several mutual funds and insurance companies have invested through the institutional route; hence, no single group can influence the market.
Q. Sebi recently clubbed FIIs and QFIs (qualified institutional investors) and put them under a new category-foreign portfolio investors. What will be the impact of the move?
A. This will simplify the process of doing transactions in India. Earlier, you had to register with Sebi to transact. Later, QFIs had to register only with the depository participant, and so the treatment was different. Hence, there was a need to rationalise and simplify things.
Q. How do exchanges provide safety to retail investors?
A. The BSE has built an investor protection fund over the past several decades. Every time someone transacts, 0.001% of the transaction value goes to this fund. Today, this pool has swelled to more than Rs 550 crore. In case a broker defaults before giving investors money or stocks, the BSE offers up to Rs 15 lakh per investor. You can compare this to a bank deposit where the insurance offered is just Rs 1 lakh.
Further, since brokers do settlements, if one defaults, others face trouble. To address this, the BSE has set up a clearing corporation and a clearing corporation settlement guarantee fund, which has in excess of Rs 4,500 crore.
Q. Are you happy with retail participation in stock markets? What steps are in the offing to increase the interest of retail investors in stocks?
A. Today only two crore retail investors take part in the market. Investors need to know that they have many opportunities in formal financial markets and there is no need to go for things such as chit funds. These investments will help in building the nation considering that the money invested in stocks goes to industries, which helps the economy grow and create jobs.
In the 138 years of the BSE's history, India's market capitalisation has grown to $1.3 trillion, that is, Rs 65 lakh crore. This is the wealth that has been generated. The Sensex has risen from 100 since launch in the 1980s to 20,000 levels. Only stock markets can generate such returns on a long-term basis.
Further, over the last 20 years, transaction costs have come down by 99%. The market has become safer and more trackable; there is an audit trail for each transaction. Having said that, investors should tread with caution. My advice is- do not believe in tips, stay invested for the long term, don't trade too much, and stay alert.
Today the BSE has more than 5,200 companies and offers information about past prices, comparison across sectors and research reports created with the help of the investor protection fund on 1,500 companies that are not tracked by research analysts. We conduct numerous investor awareness seminars and distribute books on investment topics. The BSE institute offers training from three-hour seminars to a two-year full-time MBA in finance.
Q. What are the initiatives taken by the BSE of late to increase participation and strengthen processes?
A. Most of our recent initiatives have been successful. The SME segment already has 25 companies. The derivatives segment is also stronger compared to the last twothree years with trading volume of Rs 20,000 to Rs 30,000 crore. Further, the BSE has 90% share of the offer-for-sale market, which allows promoters to sell shares to the general public. Another initiative, distribution of mutual funds, offers investors the convenience of buying funds through the BSE platform with ease.
We are introducing new trading technology, increasing the speed of transacting from 10 milliseconds to 100 micro seconds, which will increase our ability to handle orders from 20,000 a second to one lakh a second. E-IPO has already been launched. The BSE takes pride in being the lowest-cost liquidity venue in India. Our options transaction cost, for instance, is around 0.05% of what the competition charges. We are basically a retail exchange. The equities transaction cost, too, is 20% lower than the competition.
Q. What are the factors an investor should keep in mind while choosing an exchange to trade on?
A. Investors need to gauge whether the exchange has a good investor protection mechanism, a good clearing corporation with adequate capital and a settlement guarantee fund. It should also have a good reputation and long track record. The technology of the exchange and the number of companies that one can trade is also important.
Q. How strong is the Indian stock exchange system compared to others?
A. There are various parameters on which exchange systems are measured. Retail investors want safety of trading, clearing and settlement systems along with safety of advice and strength of corporate governance. Internationally, people measure exchanges on many such parameters. However, in India, the tradition is to look at volumes, which may have some relevance for traders but not retail investors. In the last 18 years, our exchanges have achieved total automation and now offer a reasonably good response time, one of the best in the world. Clearing corporations have been set up to act as settlement guarantors (so that in case a broker defaults others don't suffer). There is real-time risk management. These make India's markets strong in terms of processing transactions. Now, we are going to the next stage of evolution. The regulations as well as the IPO framework have evolved. For instance, it used to take 30-50 days to list companies. Now, it takes seven to eight days. India's stock markets are also a lot safer now compared to 20 years ago.
Q. India's markets are highly influenced by foreign institutional investor (FII) activity. Do you think it's good or there is need for a better balance between foreign and domestic players?
A. FIIs, too, are investors in search of returns with a long-term horizon. In the last 20 years, since they have been allowed to invest, they have put in over $200 billion in India's equity market. In spite of this, 80% stocks are still owned by Indians, which makes them more influential.
India needs $1 trillion new investments over the next five years to just build infrastructure. This kind of funding is not easy considering that we save only 30% gross domestic product, out of which a large part goes into gold and real estate. Therefore, we need these additional funds from abroad. It also helps us manage our current account deficit. In fact, earlier, only FIIs (among foreign investors) were allowed to invest in Indian stocks. Now, even retail investors from abroad can do so. Further, several mutual funds and insurance companies have invested through the institutional route; hence, no single group can influence the market.
Q. Sebi recently clubbed FIIs and QFIs (qualified institutional investors) and put them under a new category-foreign portfolio investors. What will be the impact of the move?
A. This will simplify the process of doing transactions in India. Earlier, you had to register with Sebi to transact. Later, QFIs had to register only with the depository participant, and so the treatment was different. Hence, there was a need to rationalise and simplify things.
Q. How do exchanges provide safety to retail investors?
A. The BSE has built an investor protection fund over the past several decades. Every time someone transacts, 0.001% of the transaction value goes to this fund. Today, this pool has swelled to more than Rs 550 crore. In case a broker defaults before giving investors money or stocks, the BSE offers up to Rs 15 lakh per investor. You can compare this to a bank deposit where the insurance offered is just Rs 1 lakh.
Further, since brokers do settlements, if one defaults, others face trouble. To address this, the BSE has set up a clearing corporation and a clearing corporation settlement guarantee fund, which has in excess of Rs 4,500 crore.
Q. Are you happy with retail participation in stock markets? What steps are in the offing to increase the interest of retail investors in stocks?
A. Today only two crore retail investors take part in the market. Investors need to know that they have many opportunities in formal financial markets and there is no need to go for things such as chit funds. These investments will help in building the nation considering that the money invested in stocks goes to industries, which helps the economy grow and create jobs.
Bombay Stock Exchange CEO and MD Ashish Chauhan
Further, over the last 20 years, transaction costs have come down by 99%. The market has become safer and more trackable; there is an audit trail for each transaction. Having said that, investors should tread with caution. My advice is- do not believe in tips, stay invested for the long term, don't trade too much, and stay alert.
Today the BSE has more than 5,200 companies and offers information about past prices, comparison across sectors and research reports created with the help of the investor protection fund on 1,500 companies that are not tracked by research analysts. We conduct numerous investor awareness seminars and distribute books on investment topics. The BSE institute offers training from three-hour seminars to a two-year full-time MBA in finance.
Q. What are the initiatives taken by the BSE of late to increase participation and strengthen processes?
A. Most of our recent initiatives have been successful. The SME segment already has 25 companies. The derivatives segment is also stronger compared to the last twothree years with trading volume of Rs 20,000 to Rs 30,000 crore. Further, the BSE has 90% share of the offer-for-sale market, which allows promoters to sell shares to the general public. Another initiative, distribution of mutual funds, offers investors the convenience of buying funds through the BSE platform with ease.
We are introducing new trading technology, increasing the speed of transacting from 10 milliseconds to 100 micro seconds, which will increase our ability to handle orders from 20,000 a second to one lakh a second. E-IPO has already been launched. The BSE takes pride in being the lowest-cost liquidity venue in India. Our options transaction cost, for instance, is around 0.05% of what the competition charges. We are basically a retail exchange. The equities transaction cost, too, is 20% lower than the competition.
Q. What are the factors an investor should keep in mind while choosing an exchange to trade on?
A. Investors need to gauge whether the exchange has a good investor protection mechanism, a good clearing corporation with adequate capital and a settlement guarantee fund. It should also have a good reputation and long track record. The technology of the exchange and the number of companies that one can trade is also important.
