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R.H. Patil

THE Indian capital market in the past decade saw the setting up of the National Stock Exchange (NSE) with the sole objective of upgrading the capital market to global standards. But interestingly, in several respects, the Indian capital market has set new and higher standards in terms of efficiency and ability to connect to an investor almost in his drawing room in any part of the world through the internet trading facility. Much of this has become possible due to the adoption of the concept of demutualised exchange by NSE and the deployment of the best informational technology tools to upgrading trading, clearing and settlement standards and adoption of the concept of dematerialisation by the National Securities Depository Ltd (NSDL).

The demutualised concept has ended the classic conflict of interests that exists when the major players (brokers) also are in charge of umpiring the stock exchange organisation. This has helped to make capital markets professionally managed and work in the best interests of the investor community at large. In so far as the Indian capital market is concerned, the last decade does belong to the twin institutions viz., the NSE and NSDL, which have helped to usher in the era of T+2 settlement system, way ahead of some of the capital markets of most of the developed countries. Among several reasons for its success, the decision to opt in favour of nationwide trading with the help of the satellite communication system proved to be crucial. NSE emerged as the largest stock exchange of the country before it completed first year of its operations. There are no parallels to this.

NSE's success was threatening enough to force the BSE to soon introduce computerised trading. All the other exchanges also followed suit with varying time lags with their own systems of computerised trading. However, the broker-managed exchanges have not been able to get over the inherent handicap of conflicts of interest. These exchanges also grudgingly accepted most of the investor-friendly rules of the game. In the process, even when they tried hard to offer better services to the investors they failed to attract attention of investor community.

The biggest irony has been that most of the prominent brokers deserted the regional exchanges and climbed the bandwagon of NSE. Trading volumes on almost all the broker-managed exchanges, except that of BSE, have vanished. In the cash equity markets, NSE accounts for nearly three-fourths of the average combined daily trading volume of NSE and BSE. In terms of the range of products available for dealing the Indian capital market has become richer. All the important equity-based derivative products are being actively traded. India is perhaps one of the very few countries in the world with a highly vibrant futures market in stocks. Futures on individual stocks today account for over two-third of the trading in all equity derivatives. The success of derivatives on the individual stocks at the NSE has been a matter of great interest in several parts of the world.

NSE has also attracted the attention of the global community as it has emerged as the third largest stock exchange of the world in terms of the number of transactions per day, next only to that of NYSE and the Nasdaq. The average daily transactions that NSE logs today are in the range of 1.9 to 2.1 million trades.

The success of NSE as a demutualised stock exchange has prompted the government to impose somewhat similar organisational model on all the other stock exchanges. However, this approach makes sense only vis-à-vis the BSE which continues to record reasonably satisfactory trading volumes. In some responsible quarters, apprehensions are being expressed about the long-term prospects of the BSE, which is fast losing ground to NSE. It is in this area that appropriate official intervention is needed to ensure that BSE continues to survive as a viable exchange. If markets have to function efficiently and investors' interests have to be served diligently there should be viable competitor to NSE. The problems of BSE have something to do with its professionalisation. Meaningful solution to BSE's problems lies in improving the quality of its governance.

The author, former chairman, NSE, is Chairman, Clearing Corporation of India Ltd.

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