Profile of the company
BSE Ltd owns and operates the BSE exchange platform (formerly, the Bombay Stock Exchange), the first stock exchange in Asia, which was formed on July 9, 1875. At the end of October 2016, the BSE was the world’s largest exchange by number of listed companies, and India's largest and the world’s 10th largest exchange by market capitalization, with $1.7 trillion in total market capitalization of listed companies. As the operator of the BSE, it regulates listed issuers and provides a market for listing and trading in various types of securities as may be allowed by SEBI from time to time. The company is engaged in extensive monitoring of its members, of listed companies and of market activities in order to minimize the risk of default, promote market transparency and integrity. By doing so, it along with other Indian stock exchanges contribute to the growth of the Indian capital markets and stimulate innovation and competition across market segments.
The company operates in three primary lines of business, namely: (1) the listing business, which consists of the primary market, which relates to the issuance of new securities; (2) the market business, which consists of (i) the secondary market, which relates to the purchase and sales of previously-issued securities, (ii) BSE StAR MF (BSE StAR), its online platform for the placement of orders and redemptions of units in mutual funds, (iii) NDS-RST, its platform for the reporting of over-the-counter corporate bond trading, (iv) membership, which includes membership in the Exchange, membership in its clearing corporation ICCL, and membership of depository participants in its depository CDSL, and (v) post-trade services, namely the clearing corporation and depository; and (3) the data business, which consists of the sale and licensing of information products.
In addition to its primary lines of business, the company also has supporting businesses, including (i) providing IT services and solutions, (ii) licensing index products such as the S&P BSE SENSEX, (iii) providing financial and capital markets training; and (iv) operating its corporate and social responsibility portal. Moreover, the company has an active treasury function focused on managing its cash, including both its own funds as well as funds that it holds on behalf of third parties (such as margins placed by clearing members).
Proceed is being used for:
The objects of the Offer are to achieve the benefits of listing the Equity Shares on NSE and for the sale of Equity Shares by the Selling Shareholders. Further, the Exchange expects that listing of the Equity Shares will enhance its visibility and brand image and provide liquidity to its existing Shareholders. The Exchange will not receive any proceeds of the Offer and all the proceeds of the Offer will go to the Selling Shareholders in the proportion of the Equity Shares offered by them.
Globally, there are over 70 major stock exchanges with a market capitalisation of more than $5 billion. The total global market capitalisation of WFE member exchanges (the WFE Exchanges) aggregated to $68 trillion at the end of October 2016. 16 of these stock exchanges had a market capitalisation of above $1 trillion each. Market capitalisation of these stock exchanges taken together accounted for 86% of the total global market capitalisation. The Intercontinental Exchange: NYSE dominates with a market capitalisation of about $18.2 trillion at the end of October 2016. In terms of turnover (defined as the value of shares traded), the Shanghai Stock Exchange topped the list with a turnover of about $21.3 trillion in 2015. The BSE Limited was the largest exchange in the world in terms of number of listed companies at the end of October 2016, with 5,868 companies.
India has a history of stock trading, dating back to around 200 years ago. Initially, the East India Company was the dominant institution and business in its loan securities used to be transacted. Gradually, the trading list broadened as the number of participating brokers increased with time. Subsequently, a formal stock exchange was established in 1875 as ‘The Native Share & Stock Brokers Association’ (which later became BSE Limited). It is the first stock exchange in India to obtain permanent recognition in 1957 from the Government of India under the Securities Contracts (Regulation) Act, 1956. Over time, BSE has built up a strong reputation and brand name as one of the most recognizable stock exchanges in India. NSE was founded in 1992 and started trading in 1994. BSE and NSE are the two dominant stock exchanges in India. BSE Limited was the largest exchange in India and the world in terms of number of listed companies at the end of October 2016, with 5,868 companies.
Most of the Indian stock exchanges, as well as major exchanges worldwide, were initially non-profit and mutual or co-operative organisations and the brokers who trade on them collectively owned and ran them. However, this structure led to a conflict of interests between the brokers trading on them and, most importantly, generally the interest of brokers was given priority over the interest of wider investing public. To overcome these drawbacks, stock exchanges became corporatized and demutualized. In 2004, the Government of India amended the Securities and Contract (Regulations) Act to make the corporatization and demutualisation of stock exchanges mandatory. BSE, Asia’s oldest stock exchange, was corporatized and demutualized in May 2005. Unlike other stock exchanges in India, NSE adopted the form of a demutualised exchange from the beginning.
Pros and strengths
Strong brand recognition: Established in 1875, the company is Asia's first stock exchange, and it is one of the most recognizable brand names in India. The company’s global brand helps in attracting companies to its listing platforms and attracting retail investors and wholesale participants to its various market and data offerings. At the end of October 2016, the company is the world's largest exchange by number of listed companies and India's largest and the world's 10th largest exchange by market capitalization, with $1.7 trillion in total market capitalization of listed companies. According to CARE Research, the BSE ranks third globally in terms of currency options and futures contracts traded in 2015, with 430 million currency derivatives traded. During the period FY 2014 to FY 2016, the total number of contracts traded in the currency market on the BSE increased from 87 million to 420 million. Further, the company’s turnover from the interest rate derivatives market grew from Rs 26 billion in FY 2014 to Rs 1,141 billion in FY 2016.
Diversified and integrated business model: The company operates a diversified and integrated business model including trading, clearing and settlement of products listed and traded on the BSE, as well as the provision of data products, IT services and solutions, the setting up of indices and training. It offers listing and trading of a wide variety of products including equity cash securities such as shares of companies and ETFs, units in closed-end mutual funds, corporate bonds and government securities, equity derivatives and currency derivatives, as well as services such as securities lending and borrowing, and platforms to facilitate offers to buy securities by listed companies and offers for sale of securities by substantial shareholders of listed companies. By providing such integrated services, it supports market participants and members throughout the entire life-cycle of a trade. Such an integrated approach benefits and keeps costs low for its participants and members by providing efficiencies that are associated with having a wide range of services.
Modern infrastructure and technology: The company has electronic systems for entry, trading, clearing and settlement and depository services and it continually seeks to improve its core IT capabilities, the reliability and consistency of which help it to maintain its competitive position. The company’s electronic systems include (i) BOLT+, a fully-automated online trading platform through which all trades on the equity cash, equity derivatives and currency segments of its exchange are executed, and (ii) precision time protocol, a time synchronization standard that it adopted to ensure accurate and reliable time synchronization across its trading infrastructure. The company has also implemented functional improvements to its infrastructure and technology, including tick-by-tick order data, multi-legged orders, and ‘straddle’ strategies for currency derivatives and equity derivatives. Furthermore, all of its platforms are interconnected and operated through the same network and workstation, which helps to provide market participants with a seamless experience and efficient operations.
Financial strength and diversified sources of revenue: In order to provide a stable stream of revenue to support its fiscal policy, the company has sought to diversify its revenue streams. As an operator of a derivatives and securities exchange and clearing, settlement and depositary services, the company has multiple contact points with its members and market participants, providing it with the ability to generate revenue at multiple levels of its business. The company derives revenue from a variety of sources including revenue from trading activities on the exchange, such as trading fees and trading tariffs, revenue from post-trade services, such as clearing, settlement, depository, custody and nominee service fees, and initial and recurring listing fees from equity, debt and derivative products, and subscription fees from data products. The company’s mix of business provides it with diverse sources of revenue that are not all dependent on market volumes. For example, the company is not only generate market turnover-related revenue, such as transaction charges, auction charges and depository charges, but also non-market turnover-related revenue, such as investment income, training income, software income and rental income. In FY 2016, revenue from operations (comprised of revenue from securities services, services to corporate and data dissemination fees), income from investments and deposits and other income comprised of 64.8%, 28.8% and 6.4% of its total revenue, respectively. In the six months ended September 30, 2016, revenue from operations, income from investments and deposits and other income comprised of 63.2%, 29.0% and 7.9% of its total revenue, respectively.
Risks and concerns
Business environment of rapid technological change: Technology is a key component of the company’s operations and business strategy and the company regard it as an important component of its success. However, it operates in a business environment that has undergone, and continues to experience, significant and rapid technological change. In recent years, electronic and high-speed trading has grown significantly. To remain competitive, the company must continue to enhance and improve the responsiveness, functionality, capacity, accessibility and features of its trading and clearing platforms, software, systems and technologies. The adoption and implementation of new technologies or market practices and the addition of new products or services to its trading platforms may require it to devote significant additional resources to improve and adapt its services. Keeping pace with the ever-changing requirements can be expensive, and it can give no assurance that it will succeed in making improvements to its technology infrastructure in a timely manner or at all. Even after incurring these costs, the company ultimately may not realise any, or may realise only small amounts of, revenues for these new products or services. If revenue does not increase in a timely fashion as a result of these expansion initiatives, the up-front costs associated with expansion may exceed revenue and prevent it from making any return on such investments. In addition, it may be unable to develop or implement new technologies in a timely manner or at all due to regulations that are not yet in place, which may materially and adversely affect its operations and its business.
Equity derivatives segment trade lower than NSE: In September 2011, the company launched a series of liquidity enhancement incentive programs (the LEIPS) in an attempt to enhance liquidity in its equity futures and options segment and to compete with the NSE share in the derivatives segment. Under the LEIPS, the company lowered its transaction fees and offered volume-based and open interest- based cash incentives to its members. The company’s expenses for the LEIPS in FY 2012, FY 2013, FY 2014, FY 2015 and FY 2016 was Rs 604.9 million, Rs 955.4 million, Rs 612.9 million, Rs 342.5 million and Rs 172.4 million, respectively. Although equity futures and options turnover on the exchange increased under the LEIPS, it began reducing the incentives during FY 2013 and removed them entirely as of April 1, 2016. As a result of discontinuing the LEIPS, there was a sharp decline in equity derivatives trading on its exchange from FY 2015 to FY 2016 and for the six months ended September 30, 2016, decreasing by 99.9% from its height of 2,080,160 equity derivative contracts traded per day in FY 2015 to 954 in the six months ended September 30, 2016. The company may not be able to maintain or increase trading in its equity derivatives segment and there is no guarantee that it will be able to compete in this segment with the NSE.
Stiff competition: The company faces significant competition for listings, clearing, trading and settlement of cash equities, ETFs, structured products, futures, options and other derivative products. As a result of increased liberalization and globalization of the world capital markets, industry consolidation and an increasing number of traditional and non-traditional trading venues, the company expects such competition to continue. It competes with national market participants in India, primarily the NSE, in a variety of ways, including the cost, quality and speed of trade execution, market liquidity, functionality, ease of use and performance of trading systems, the range of products and services offered to customers and listed companies, and technological innovation and reputation. Some of these competitors are also among its largest customers. Increased competition from existing, new and potential competitors, such as the NSE and the Metropolitan Stock Exchange of India (MSEI) for equity-based products and the Multi Commodity Exchange of India (MCX) and the National Commodity and Derivatives Exchange of India (NCDEX) for commodities, could cause it to experience a decline in its global market share of listing, clearing, trading and settlement activity. Such a decline would translate into a decrease in associated transaction fees, clearing and settlement fees, the company’s proportionate share of market data fees, net investment income, custody fees and other related revenue, which would materially adversely affect its financial conditions and results of operations. In addition, increased competition particularly in a highly regulated environment may exert a downward pressure on fees in order for it to remain competitive, which could materially adversely affect the company’s business, financial condition and results of operations.
Uncertainty on intended global ventures - The company intends to operate an international exchange and an international clearing corporation in GIFT City, a multi-services Special Economic Zone that is currently being developed as India's first international financial services centre. The company’s Board of Directors approved a macro business plan regarding the GIFT City Project in May 2016. In September 2016, it incorporated BSE International Exchange (IFSC) Limited, now India International Exchange (IFSC) Limited (IIEL), for the international exchange and BSE International Clearing Corporation (IFSC) Limited, now India International Clearing Corporation (IFSC) Limited (IICCL), for the international clearing corporation. While the international exchange and the international clearing corporation have been granted recognition, there can be no assurance that the company will be able to commence operations in a timely manner or at all it will be able to secure further recognition upon expiry of the present approvals. In addition, it may seek to partner with third parties, such as other global exchanges to jointly operate the international exchange and/or the international clearing corporation.
BSE is India's largest stock exchange by number of companies listed. It has over 5000 companies listed on it, the highest in any exchange around the world. World’s two leading global exchanges, Deutsche Bourse and Singapore Exchange are strategic partners of BSE. The company intends to strengthen its position as a preferred exchange in India and expand its cross-border reach by entering into strategic alliances. On the concern side, the company operates in a highly regulated industry and may be subject to censures, fines and other legal proceedings if it fails to comply with its legal and regulatory obligations, including its oversight obligations regarding listed companies, also the trading on the company’s equity derivatives segment is less than that on the NSE.
The issue has been offered in a price band of Rs 805-806 per equity share. The aggregate size of the offer is around Rs 1243.44 crore. On performance front, the company’s revenue from operations for the six months ended September 30, 2016 increased 26.6% at Rs 241.56 crore as compared to Rs 190.76 crore in six months ended September 30, 2015, primarily as a result of increase in securities services, services to corporates and data dissemination fees. The company’s profit after tax for the period increased by 60.4%, to Rs 128.70 crore as compared to Rs 80.26 crore in the corresponding period previous year. For the full year ended March 31, 2016, The company’s revenue from operations increased by 18.1% from Rs 361.14 crore for FY15 to Rs 426.54 crore for FY 2016. Moreover, the company’s net profit after share of minority and share of loss of associate as restated decreased by 5.6% from Rs 129.74 crore for FY15 to Rs 122.53 crore for FY16.
The company actively evaluates products and asset classes outside its traditional focus areas in order to diversify its revenue sources. By doing so, it seeks to continue to attract market participants and issuers and to capture the significant revenue potential that comes with a broader product line, particularly derivative products. In order to capture growth in the Indian market, the company is planning to design platforms and products targeted towards specific demographics in India, such as a mobile phone enabled trading platform, targeted towards the growing number of mobile phone users in India. The company has generated RoE between 3-5 percent in past three years and has a track record of healthy dividend payments. The issue has been competitively priced and offers a decent investment opportunity in the sector. It is one of the most recognizable brand names, with its global brand helping in attracting companies to their listing platforms and attracting retail investors and wholesale participants to various market and data offerings. Strong state-of-the-art infrastructure and technology coupled with diversified and integrated business model makes it a value play and a long term prospect.