Mr Ashok Chawla, Chairman, National Stock Exchange of India Limited sharing a laugh and firm hand shake with Mr Ashishkumar Chauhan, MD and CEO, BSE Limited as Mr Sudhakar Rao, Chairman, BSE Limited looks on at the listing of BSE Limited in Mumbai. The Asia’s oldest stock exchange BSE, has become the first stock exchange in India to be listed
Asia’s oldest stock exchange BSE, was listed on the National Stock Exchange at a price of Rs 1,085, or a 35 percent premium over its issue price of Rs 806, on Friday. The shares touched a high of Rs 1,200 in the mid-morning session clocking a return of 48 percent. “I never expected such a strong response to our initial public offer. I’m really happy about the way investors have given a positive response to the issue,” says Ashish Chauhan, managing director and chief executive officer (CEO) of BSE.
The Rs 1,243 crore IPO is the first such offering from a local stock exchange and it has become the first exchange to get its shares listed. Next in line is the National Stock Exchange, which has announced its plans for a mega Rs 10,000 crore IPO. As of June 30, 2016, the BSE had 1,440 unique members across all segments and in FY16, the BSE accepted an average of 284.92 million orders and 1.55 million trades in equity shares per trading day, placing it as the 12th most active exchange in the world in terms of electronic book trades in equity shares.
Broking firms and analysts had given a positive outlook to the IPO as the valuation was reasonable. “At the higher price band of Rs 806, the issue is valued at 20.6x FY17 annualised EPS [earnings per share]. The valuation looks attractive compared to 43x FY17E and 31x FY18E estimated Bloomberg consensus estimates of MCX India Ltd. We believe that well-integrated and diversified business model coupled with robust financial strength will help BSE to invoke maximum investors’ interest. Further, the BSE shareholders will also get incremental benefit from the listing of Central Depository Services Ltd (CDSL), in which BSE will offload 26.1 percent stake (out of 50.1 percent stake) in IPO through Offer for Sale,” said a note from Reliance Securities.
Data from BSE and NSE showed that the BSE issue was oversubscribed 51.09 times. Bids were placed for 55,21,43,628 shares, against an issue size of 1,07,99,039 shares, for a price band of Rs 805 to 806.
“It is for the first time a stock exchange is listed on another stock exchange. There is total euphoria. Besides, the BSE is the oldest stock exchange in Asia and enjoys tremendous brand equity. Now I’m more curious about the listing of the NSE”, says a fund manager with a leading mutual fund.
BSE is the world’s largest stock exchange in terms of the number of listings, with over 5,900 companies registered with it. It is the world’s 11th largest exchange by market capitalisation, with $1.52 trillion in total market capitalisation of its listed companies.
The BSE, over the years, has lost its dominant position in the cash segment to rival NSE, due to late adoption of derivatives, which it lags. Today, almost 99 percent of the derivatives market share belongs to the NSE.
The BSE generates around 21 percent of its revenues from corporate fees including the annual listing fees, which every company needs to pay to remain listed on the exchange, this is an annuity business. This segment has seen a healthy 20 percent CAGR over FY12-16 in revenues and provides a cushion against volatility in the markets. Most importantly, an exchange does not have capital expenditures and its customers are sticky.
The BSE is attempting to stay ahead of the NSE with product innovation—in the form of currency derivatives, debt markets, mutual funds, an international exchange and later commodity trading—which would add to the revenue mix and boost the brand. The BSE’s revenues from operations stood at Rs 426.54 crore for the twelve months to March 2016, a gain of 18 percent from Rs 361.14 crore for the corresponding period a year earlier.
The offer for sale has allowed the existing shareholders to sell their shares in the public market. These shareholders include the Singapore Exchange, Atticus, a foreign fund, and George Soros’s Quantum Fund. Together, the three investors own 24 percent of the company and account for 85 percent of the offer for sale.
Sebi’s approval comes close on the heels of rival NSE filing its own draft red herring prospectus in December 2016. According to analyst and media reports, NSE is valued at around Rs 45,000 crore while the BSE is valued at around Rs 5,200 crore.
BSE’s offer was valued at a price-to-earnings multiple of 33 times while the NSE offer is valued at 46 times its earnings for FY16. NSE’s valuation is at a par with global stock exchanges like the London Stock Exchange, which has a P/E of 42 times.
Over the years, BSE has lost market share to NSE in both the cash and derivatives segment. NSE owns 85 percent of the total market share in the cash segment and almost 100 percent share in the derivatives segment.
Ashish Chauhan, who joined the exchange in 2009, had kept the exchange fighting fit. When he took office the market share of BSE in the cash and derivative market was at around 3 percent. Chauhan has got the share of the cash segment to around 15 percent. He partnered with Deutsche Boerse for trading technology and tied up with Standard and Poor’s Dow Jones (SPDJ) Indices to elevate the Sensex brand.
The 30-share BSE Sensex is now the S&P Sensex, giving it an international image boost. He is also responsible for building BSE SME platform for small enterprises. The platform has 163 listed companies which have raised Rs 1,272 crore. Yet these small companies lack liquidity. And that itself has become the big challenge for BSE.
While the business of exchanges has annuity income streams and one-time capital expenditure, the business is totally dependent on liquidity. Exchanges find it difficult to maintain their annual revenues as liquidity dries. High liquidity guarantees lower impact costs which in turn drives further liquidity and more market participants.
This liquidity aspect is the biggest challenge to the BSE. But stock exchanges are also sticky businesses. Traders or market participants rarely move from one exchange to another if they get guaranteed liquidity. BSE has been grappling with this challenge for some time.
According to the Reliance Securities note, “Globally, there are around 70 major stock exchanges with a market capitalisation of less than $5 billion. The total global market capitalisation of world federation of exchanges (WFE) aggregated to $68 trillion as of October 16. Sixteen of these stock exchanges had a market capitalisation of less than $1 trillion each, which accounted for 86 percent of total global market capitalisation Intercontinental Exchange: NYSE dominates with a market cap of around $18.2 trillion as of October 2016. In terms of turnover (defined as the value of shares traded), Shanghai Stock Exchange topped the list with a turnover of $21.3 trillion in 2015. The BSE was the largest exchange in the world in terms of number of listed companies as of October 2016.
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