ValuePickr Forum

BSE (Bombay Stock Exchange)- Bet on Financialization?

this is a head wind from the short term profit perspective.

the last time around, in 2012, when bse introduced LEP it was burning about 60+ crs annually on incentive fees.

this time around, just looking at the daily pools in their announcement so far, it adds up to about 5 lacs a day. so about 12 crs a year. i am not sure if i have captured all the incentive fees. so, it might be higher.

i hope this time its more successful. if anyone has any documents/articles describing why the marketshare gains were not persistent in 2012, please let me know. i realise that inter-op was a factor. but want to know what the other factors might be were. thanks!

They discussed this in the recent Q2FY20 CC. Sharing my notes and transcript of the same.

Q2FY20.pdf (1.2 MB)

SG&A and Other expenses have increased due to many one time provisions on ILFS exposure of 2.6cr. BSE Start MF receivable provision of 3 cr. CSR spend of 1 cr for full year. Provisions for listing fee 2 cr.

Power exchange license should be there in 2 months if no new conditions are brought by the regulator.

Revenue degrowth - small stocks used to be the mainstay of our revenues. used to be 50% in 2016-17 now it is 10%. Due to market going down. Value of these have gone down by 80%. And new sebi rules have reduced MF exposure to these stocks. Whenever markets pickup the revenue will comeback. 2nd, IPOs BSE is much larger than others and we used to earn 50-70 cr revenue. IPO market is down for past 2 years. Corporate restructuring and rights etc have also reduced.

international exchange is in a loss as we are not charging yet. we do about 2 bn per day. competition is not charging. RBI is giving approval for USDINR contracts. We will see more volumes. Current loss for H1 was 17.2 cr for INX and ICCL. Includes LES.

EBIX - CAPEX is 25 cr our investment is 10 cr. Should be live in 2 months. We have 10 companies tied up, 5 in life, 4 in general and 1 in health. We have been testing the software for an year now.

We are more involved with the client than policybazaar which only gives comparisons, we will conclude the sale, which doesnt happen at PB. We will do post sale service also like advising and claim processing in case required. We will get commissions from the insurance cos. We will pass on some of that to sub brokers. It is a sub broker distribution platform.

Will continue to have LES in equtiy derivative and INX. In ED we are doing 150-170 cr a day, on STT basis people are spending 5-7x more than what our incentives are.

Our revenues are cyclical or variable with markets, while our costs are fixed. When market does well it will all goto the bottomline and when they dont it suffers. But this time MF platform has helped and compensated for the fall. It may compensate even more.

The MF receivable provisions is precautionary and due to us consolidating our position and we get requests of renegotiating the terms. We have reduced the 3 cr provisions from this Q revenue. So it is 8.8cr income vs 11.9 cr last q.

We will take a quarter to start if we get power exchange license, we should start generating revenue immediately as the business is non-discount based.

In commodity our job is to provide better regulations, lesser defaults, better technology and risk management. Results will come when people appreciate our offering. They come from unexpected areas. We expected from gold and crude we got from guar and cotton.

We will relaunch crude with ICE collaboration, with no additional cost.

New change in SCRA to allow options in spot market. Till now options in futures were allowed with minimum liquidity requirements and we couldn’t launch those options.

BSE Star MF - So basically, the way I look at it is today, we have become 15% of all the funds going into mutual funds, including the past SIPs and whatever. We do around 46 lakh transactions a month. Even if the market doesn’t grow, which it does not over last four, five months because market is being bad, the mutual funds also didn’t grow so well. But we have been, in a sense, a large provider of new orders to the mutual fund industry in last five, six months. And over a period, if the mutual fund market grows from say, 3 crore transactions a month to 6 crore transactions a month then if we become 50% of that, then we basically will grow almost six, seven times of current and in terms of volumes and value might be probably again 50% to 100% larger. So that’s how I would put it that there is enough and more scope for growth of this platform. And it has sort of helped us conceptualize a new, completely new, platform in the insurance because this has come like a breath of fresh air not only for us but also for the distributors that they were searching for something like this. There was nothing which was available and now suddenly it is so much more popular that we have like 54,000 or 57,000 people officially there on the platform, right, which is large.


You raised a fair question. Only difference big difference is the interoperability as you mentioned. Other small difference is BSE has better latency compared to NSE. of course this will only come to picture once there is enough liquidity.

Im also confused why BSE chose to divest 4% of its stake in CDSL.

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If the CDSL stake sale happens at a discount of 10% from today’s share price, the cash flow post tax to BSE will be about 75 Crore. This will bring down the BSE’s share holding in CDSL to 20% which is the minimum share holding required to call CDSL an associate.

Really not sure of the reason for this divestment, considering BSE has adequate cash to fund for its business growth and investments. Also note that CDSL is a cash cow and still has significant potential to grow its business.

CDSL share price has not really reacted to this news - its just 1% down today.

Best regards,

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Hi, recently started studying BSE. What is the free cash & equivalents on the balance sheet as on Sept 30 which can be used for growth / dividends? As I understand from the annual report a portion of the reported cash is earmarked as margin money or for the SGF… Also does BSE have to hold a min stake in CDSL by law or can we consider the balance 20% held post stake sale potentially translating into cash in the future? Thanks.

My thoughts on a couple of recent initiatives and on the CDSL disinvestment…

I would view BSE as private equity firm with a peculiar set of attributes - a. the extraordinary regulatory moat that comes with being a universal exchange, b. the renown that comes with being a facilitator in the BFSI space, thanks to a track record of more than a century – even in less regulated / fairly open fields (MF is a good example) and c. an inherent cyclicality in revenues and profits, with each cycle lasting 5 / 7 / 10 years.

A majority of investments a PE firm makes will turn out to be duds; the many attempts that BSE has made to gain market share in equity cash & equity derivatives over the last decade are good examples. In the same vein, if you happen to be a successful disrupter adding value to the entire ecosystem, the quick turnaround and rapid scale-up can be rewarding; StAR MF is the ideal example. For eight years, from 2009 to 2017, the platform would have been burning cash and earning zero revenues. For the first few years, only BSE brokers were allowed to transact on the platform; it was only in 2013 that SEBI permitted all ARN holders to board and to transact on behalf of their clients; we all know where it stands today.

Adding value to the entire ecosystem – two examples

I believe BSE must be a trustworthy facilitator of transactions in the real world – and NOT a casino – if we (investors in BSE) are to be rewarded in the long run.

BSE Ebix has received in-principle approval from IRDAI, the regulator. Thanks to the recent Ebix and BSE concalls we have plenty of information wrt to the venture. While there a few online portals offering insurance related services, BSE Ebix seems poised to add a lot more value to all players concerned – insurers, TPAs, agents and consumers. We are likely to learn a lot more in the year ahead.

Agri-commodities is another interesting space. Agriculture constitutes a significant component of our economy. However, the farmer earns a miniscule percentage of what the consumer pays for the produce. This represents extraordinary inefficiency – and NCDEX, with its focus on farmer collectives, does not seem to have improved things significantly.

BSE seems to have adopted a slightly different approach – it is attempting to work with the respective trade bodies and tailors its contracts to suit their needs. BSE also has a 24% stake in CCRL – thus establishing a seamless connect across the entire value chain and ensuring the integrity of the system. Mr. Chauhan’s reference to “the business of trust” in the recent concall emphasizes this point.

No doubt agriculture is a sensitive subject, with a variety of structural impediments over which BSE has zero influence or control. It is attempting to present an alternate approach to the agri trade; whether it will succeed and be profitable is too early to tell. However, if it manages to bring even a small improvement in the efficiency of the intermediation process, it is likely to expand the scale and scope of agri-exchanges exponentially.

In this regard, what IEX has achieved in the (short term) power market over the last decade gives me hope – after all, electricity is another sensitive subject, and the market was riddled with inefficiency, with no meaningful mechanism for price-discovery. Even today, the medium-term & long-term PPAs are steeped in opacity and unsavory practices.

Any regulated entity (those coming under the purview of SEBI / RBI / CERC / IRDAI / WDRA etc) will need to “set aside” cash – regulatory capital, SGF, a clearing corporation at arm’s length etc. – depending on the nature of the entity. This is “encumbered” cash – it cannot be touched.

I would view the CDSL stake sale keeping a few factors in mind a. the recent, substantial buyback, b. a number of “growth” investments – India INX, Pranurja, BSE Ebix, commodities, equity derivatives etc and c. we are nowhere near the peak of the cycle in terms of revenues and profits of the core exchange business.

CDSL is a mature and profitable BSE investment; BSE’s stake is unencumbered and liquid. It is possible that a regulator is pushing for a further reduction in its stake; it is equally likely that BSE needs the cash for deployment elsewhere - hence the proposed sale. BSE will still continue to hold 20% of CDSL. I would not read too much into this.

Disc: Invested; views biased.


BSE starts well and then keep losing marketshare …

In Equity its share is down to single digits
In currency derivates 2 years back it had 46% , now it is down to 41%
In Interest derivatives 2 years back it had 41% Mks , now it is down to 27% .

++ Add to that it does not have discipline to monitor cost. In last 2 years it has added 80 crores . ie by 25% Gr to expenses when revenue has declined by 40crs ( 10% )

It keeps on moving to next venture before stabilising its existing venture …

What will ensure it will retain Mks in Star MF , INX etc ,… Some how something does not add up . Not sure what it is

Discl : Invested


i agree that cdsl sale doesnt matter much. esp when it has to do it at these prices.

however the arguments 1) needs cash for investment 2) regulator pushing for this - i dont agree with. #1 because it is sitting on 2k crs cash and may be 1.6k crs is unencumbered. #2 if the regulator wants to push for a lower maximum holding then it would be public and i havent seen any announcement?

my sceptical take is that - they are looking to book profits so that the reported numbers look better optically. with headwinds like leps and low volumes in exclusive segment they need a little boost to the net profit/eps number.

but, i dont think it matters too much.

now re the leps. it seems like between 2012-2016 they spent 260crs on the scheme. in 2013 was the maximum with 95 crs spent. and it was able to take a substantial flow - which i was very surprised about. but it gave it all away.



The share of stock exchanges (vis-à-vis banks and OTC dealers) in currency and interest rates is miniscule. The combined annual revenues of BSE & NSE in BOTH these segments is likely to less than 25 Cr. Unless the RBI allows BSE & NSE to leverage their inherent advantages (extended trading hours, for a start), these market share numbers are, IMHO, more show than substance.


TBH, I have no clue as to why BSE is diluting its stake. However, I wait for clarification, rather than assuming that management is “managing” the numbers. We should have the relevant information – latest by the Q3 concall.

As far as the LES goes, yes, I do agree that – even with interoperability – it will likely be a losing cause.

I am curious to know why the operating cash flows are negative for BSE?

BSE was able to complete the OFS at a price of ~243. (page 99)
What is the ‘other income’ and ‘other operating income’ here?

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They follow a different segmentation method in their investor presentations and annual reports. I used the Q4FY19 presentation to match the figures with FY19 annual report.

The data to match is on Pg. 28 of the IP and Pg 139 of the AR. Both are consolidated figures.

So as per Q4FY19 IP other operating income in FY19 was 65.2 cr. As per FY19 AR, this totals the sub-segments of Data dissemination fee, training institute and software license sales.

As for the other income of 35 cr, as per the note 25 to the on Pg 189, this consists of rental income,website income, interest on income tax refunds, misc. income, incentive from govt. and excess provision written back.

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Growth has certainly slowed down in number of transactions, but the whole MF outflow is pretty hight in November. Given the weak sentiments prevailing in markets starMF is doing really good.


Commercial Papers:
In less than a month, 50 issuers have done 258 issuances of commercial papers and listed CPs of Rs 1,05,795 crores on BSE. The weighted average yield of these issuances is 6.09 per cent with an average tenor of 138 days - Chauhan

BSE Ebix Insurance Broking receives certificate of registration from IRDAI; plans to be operational next month.