I think it is a good idea to start a formal “retail shareholders association” with retail shareholder members and they can apply pressure on listed company managements on various issues. All proxy voting could be directed to the representatives of this association.
Just a thought…
If they distribute CASH on the books they will become net loss making company, Their salary comes from the other income.
Worst is they did buyback at exorbitant valuation from open market destroyed the value for the staying shareholders and i can say from selling pattern some brokers (Pre IPO shareholders) made huge profits out of their open market buying, I kind of feel the some guys knew when the buying was happening.
@myprasanna You have raised an important and a valid issue. I do not know if India has proxy vote advisory companies like they do in the US, which play an important role in the corporate governance of listed companies in the US. It would be interesting if VP platform can evaluate, if it can play a part in the creation of such a platform in the country. There definitely seems to be a vacuum in this space.
A brief background on Proxy Advisory companies can be found in the below link. http://www.theactivistinvestor.com/The_Activist_Investor/Proxy_Advisors.html
In India, we have few Investment advising firms to institutional investor.
https://www.sesgovernance.com/
Some more background for Proxy adivising form in India.
My apology for putting message not related to BSE business, but thought it would be useful to reader.
Discl: No investment in BSE
Seems like SEBI is reading these posts. Or maybe somebody at BSE who made sure changes take place. SEBI has asked brokers to not favour NSE for its trades and BSE said it will take strict steps to see that the rules are followed. There is a chance that volumes at BSE equity will finally start rising again.
I understand the annoyance of many shareholders regarding BSE. BSE itself is one of my larger positions. But one should not be too quick to judge the management. They don’t have an easy job battling with NSE. Even though I am not satisfied with the performance, but regarding cash and management, I have a few observations.
There are some positives:
I agree that there is some uncertainty regarding BSE and the price of uncertainty is the current low valuation. Price of certainty in markets is very expensive. The way I think, it has a great margin of safety when looked from a long-term perspective. As with every investment, there are chances that this might not work out. Despite being debt-free, cash rich and high entry barrier business, my thesis can go wrong as the world of business and investments are to some extent uncertain.
Disclosure: Invested in both BSE and CDSL. Biased.
Hi Adhiraj,
BSE is one of my top 3 positions. I really like the valuations and own a lot of it. I think this obviously is a no-brainer story beaten down in price because of lack of skin in the game behavior of management. Otherwise a co would not sell below liquidation value.
I agree with everything you have mentioned, except that BSE needs to hold this much cash. Each new venture that BSE makes is under 50 Cr/year – these are asset light businesses. Do you really need to hold 2000 Cr of shareholder money? Does returning say 1000 Cr affect the ventures you can get into in any tangible way? What do you think will really change? Except the co can’t optically report FD income as profits and talk BS.
I agree it would be nice for the management if they had to make no difficult choices when the core businesses are melting away and they would rather continue hiring more staff and working on new ventures. But is it really what is best for the shareholders? Whose cash is it really?
What makes you think institutions are exerting any pressure on Ashish? I spoke with a 2% shareholder and they are tired of the empty promises and lack of delivery. The issue ironically with BSE is that no one party owns enough stake that Ashish still has not lost his job after a decade of underperformance and instead proposes himself a raise.
And why does he not own any stock in the company? His job is to encourage others to own equities and yet he doesn’t himself.
Let’s say you had 2K Cr with you and Ashish works for you, will you really give it all as play money for him? The core business is shrinking – although it isn’t really his fault, with NSE and moat etc. But not shrinking your expenses in response and just pretending like nothing is happening is entirely his fault. Paying himself a nice raise is also (the board and) his fault.
Also, by what metrics do you evaluate if he is doing a good job or not? It is true that he was a founding member of NSE, which is a 20 year old story. How do we look forward?
Having gone on this rant, while it is very annoying that management is stealing from my pocket, I am fine riding along as a shareholder who came in, when the stock was around 350, at 66 cents on the dollar, of liquidation value. I expect to make good gains. If this was the US, Carl Icahn or someone else would have unlocked the price beyond liquidation value in a few months and would be a virtually risk-free trade.
Thanks,
-Prasanna
Good post @myprasanna
The major issue with “professionally run” managements" with no stakes in the company is that they don’t feel the pain of owners/shareholders. They are really after salaries/perks and other bonuses (they don’t think like owners) - shareholder return is not in their thought process…That is why I avoid investing in companies where managements and directors don’t have significant skin in the game. But there is a lot of value in BSE - it is such an iconic brand.
I hope someone asks the question to the CEO during concalls about not owning shares in BSE. He constantly moans that BSE is undervalued…
Discl - minor investment in my mother’s account which I manage
BSE has launched new platform for insurance broking in JV and insurance is upcoming theme of next decade. So it shall be evaluated now as its introducing new line of business as well where its going to cater life, health and general insurance. So watch out for this company now
That was a good post and you ask some really good questions. We both are in the same boat as of now.
Regarding Ashish Chauhan, I agree with you on him to a certain extent. I too have mixed opinions on him as of now. He doesn’t have stake himself and that is a negative. It would be great if someone can get a response from him through concall regarding this. I usually don’t like managements without SITG although this is an exception. I don’t know any internal workings of the board. It would be great if someone would be able to tell the ground reality and his influence over the shareholders. I completely agree that when the company is not structurally profitable, expenses should be reduced and getting pay raises is not in the best interest of shareholders. As I said in my initial post, it is a big negative for me.
It may be true that he doesn’t face much pressure from the shareholders to deliver returns but it would be highly unlikely to conclude that he is completely immune to the shareholders to such an extent that he can get away doing anything on a long-term basis without repercussions. Especially where the company is institutional owned and he himself doesn’t have stake. He hasn’t increased the bottom line, true but I think the reason he has is still backed by shareholders is that he has created revenue streams for the future such as StarMF, INX, etc. It takes a lot of time and effort to create them and one can’t expect quick returns. There was no other better way to revive BSE which was always lagging in its core business. Building the platform, getting volumes, building trust while fending off competitors like NSE takes time. NSE hasn’t been able to snatch much of market share from StarMF or INX till yet which is a big positive considering they can price them out with the mammoth cash balance which they have.
And regarding cash position, it is less than what it seems. If I’m not wrong, they have 1300 Cr of liabilities from clearing and settlement for which they need to maintain liquidity of the similar amount. They don’t earn any interest on that. So, discounting CDSL and other associate stakes, they are left with around 1200 Cr which is parked in mutual funds and other funds and a few hundred crores surplus in cash.
True, they can give some of the cash back but they must plan for the worst of the scenarios and keep more than enough liquidity to survive in the unlikely event of extended period of losses and black swans. They may not be able to build new ventures and support them for long if they have liquidity of only a few hundred crores while also taking operating losses. Lack of investment income could increase losses further and major surplus can be wiped out. So, I think it is not a really that big of a surplus to have in such a scenario when your major competitor has at least 10 times your cash position.
I agree with you that they must give the most of the cash back in the future but don’t agree that it should be given back now. I am extremely long term on this and am willing to wait a little longer till the business turns itself around. The idea of a loss-making company giving away most of its cash in a time they are not profitable does make me uncomfortable as a conservative investor. The potential this business has is much more than what I can get through dividends and buybacks.
I would also not agree to call hoarding the cash as stealing as they are not siphoning any cash home. Neither the management nor the shareholder benefits from keeping idle cash. Usually conservative managements keep idle cash in balance sheet. And being ultra conservative isn’t bad. Buffett and tech/IT companies keep mammoth cash positions. The thing about keeping cash is that it doesn’t hurt much but helps you survive in tough times and take risks. Eventually they will have to return the cash when things fall in order and it is very likely in such a scenario, the management will most probably pay the excess cash out through dividends and buybacks as in most institutionally owned companies. There was pressure on Chauhan to let go of some cash by the shareholders and many questions popped in concalls regarding that. He had to initiate a buyback. So, I am not worried over what might be just a delayed paycheck to me. I believe they are being ultra conservative here as business is not generating operating profit and they are taking losses through many ventures. And that is not a bad thing as of current scenario.
Thanks
Without being able to validate - i heard in his interview, that as part of being CEO of a stock exchange, as per regulation, he is not allowed to own any stocks. This would imply that they are not allowed to own stocks of BSE. Hope , that clarifies as to why he does not own any shares.
I am guessing, the same might apply for other members of the management.
NOT defending the CEO, however. I too have mixed opinions about him.
In the last conf call management said their “free” assets (after all liabilities) are:
My fear is management is going to burn it through. 
That’s the only way for me to lose. I’d be up on a liquidation scenario. Market is pricing the stock that way as well, so I’m obviously not alone in that fear.
I’m definitely worried about the ever delayed pay check you are alluding to. And please don’t compare him with Warren Buffett hoarding cash. Doing buy-back at 2x the stock price and instead hoarding cash under liquidation value is a value destructive crime.
Three news items today - one negative and two positives. The biggest one seems to be SEBI allowing broader investor profile for GIFT city bourses. With HongKong in turmoil and so much liquidity floating around the world, this may help in monetizing INX…
Disclosure: Invested
I came to conclusion that it is a value trap mainly due to its market positioning. This type of biz generates monopolies and BSE can’t shake NSE ever. The big gets bigger and that is true here despite first mover advantage to BSE. I started analysing and ended up buying MCX and IEX as they have better control of their respective markets than BSE. I have not regretted that decision. Other new segments for BSE can grow but what stops NSE from challenging BSE again when it comes to equity related segments.
Interesting management interview
EBIX’s alleged questionable past.
Here is my analysis of BSE Limited
Stock Exchange Sector Analysis
Financialization theme - India is a developing country and the average age of Indian is 29 years. With literacy rates and per capita income increasing, the share of financial assets as a percentage of GDP is bound to increase.Stock exchange business is like a toll bridge for financial instruments like stocks, mutual funds, derivatives with relatively stable operating costs. Companies approach stock exchanges for benefits of listing. A listed company is trusted more as it has to abide to the norms set by SEBI – market regulator in India. Listing at a stock exchange will help in fund raising which subsequently helps in growing their business. Every developed/developing country encourages investments in stock markets so that it will indirectly improve the employment and tax revenues.
So, with a greater certainty, we can safely assume NSE and BSE will stay for long in India as these are the only two major stock exchanges with a significant entry barrier and closure of any of these two is practically impossible.
NSE market cap is hovering around(unlisted) 40,000 Cr and BSE market cap is around 2200 Cr. NSE is the market leader in Equity Cash and Derivatives segments and beats BSE by a significant margin.
The majority of revenues for NSE comes from derivatives segment which is nothing but – Futures and Options. NSE derivatives segment average daily turnover is at least 20 times bigger than NSE cash segment average daily turnover.Ideally, these should be used for hedging but most people use it for speculation.
Comparison with some international stock exchanges market capitalizations
Australian Stock Exchange – 16.15B AUD or ~86000 Cr (INR)
Hong Kong Exchanges and Clearing Ltd – 58.6B HKD or ~56000 Cr (INR)
Pros –
Zero Debt & Cash rich
Diversified revenue verticals
Market value of investments Rs.2221.39 Cr. is more than the Market Cap Rs.2221.05 Cr. and Stock is trading at 0.92 times its book value as per screener.in
Distribution platform à BSE understood that beating NSE in cash equity and derivatives segment is very difficult and so thought about the other options. Mr. Chauhan’s vision about BSE is to make it a distribution platform
Subsidiaries
BSE is the world’s fastest stock exchange and it has the technology edge compared to other exchanges in India. BSE reacted quite fast to bring in the negative price feature for commodity derivatives compared to MCX
Cons –
For example, HDFC Securities in battling discount brokers like Zerodha, removed brokerage for 3 months. I don’t know whether they were successful in getting more market share but they are all over the place in marketing it. Mails, SMS, HDFC Securities page, relationship manager calls etc.
With so many new speculators in the market, this is the time to promote their differentiator product even more effectively – Sensex 50 Weekly Contracts with Monday expiry. NSE Weekly Contracts have Thursday as expiry.
Mr. Chauhan certainly is operating BSE like a PE investment firm when we look at his enterprising foray into different verticals. Some investments click and some don’t.
A little background about Mr. Chauhan. He comes from a humble background from Gujarat and went on to complete his studies in IIT Bombay & IIM Calcutta. He played a major role in setting up of equities and derivatives while in NSE from 1993 to 2000.
He joined BSE in 2009 as deputy CEO and working as CEO from 2012.
Even though he talks about “understanding technology intuitively” in the above video, if you read between the lines, he has a solid understanding of how the world works and the ways of getting things done.
See how he is selling BSE Start-ups platform https://www.youtube.com/watch?v=IRCv5JDjv4U
His honesty about not promoting speculation/trading for the sake of it is really appreciable https://www.youtube.com/watch?v=41Koi-6ws2I
India INX
It was inaugurated by Indian Prime Minister Narendra Modi on 9 January 2017. The trading operations began on 16 January 2017. It operates on EUREX T7, an advanced technology platform. It is the world’s fastest exchange, with a turn-around time of 4 microseconds.
It operates 22 hours a day, six days a week. These timings facilitate international investors and Non-Resident Indians to trade from anywhere across the globe at their preferred timings
So how much should BSE Limited be valued? 2200 crore? I may be proved wrong but before BJP’s second term ends, India INX itself will be valued more than 2200 crores. This is more of a hope story and my thesis can go for a toss.
Apologies for lengthy mail.
Disclosure – Invested and biased. Started adding BSE on the day it was at 52 week low and bought on dips after reading more about it and currently holding with an average price of 407. My investment horizon is very long term.
Extensive number crunching is done on BSE… please go through the previous posts above in the thread.
I reduced my portions in BSE after hearing Q4 concall… Main reason was
they accepted the demand from MF industry to reduce the charges ( to almost half I believe) for starMF… reason given was they wanted to help out MF industry. Main contributor and growing part was starMF… this disappointed me…
Mr. Chuahan also said that they wont charge any fee for India INX anytime soon ( at least for next one year). INX revenue is pretty cyclic…
BSE was keep loosing USD/INR market share to NSE… even thought they had about 50%. Not able to retain market share was big negative for me… Mr. Chauhan came up with some reasons but it was not convincing for me…
Being said that some positives
equity day trading turnover has almost doubled… ( it was avg 2k Cr per day now its 4k Cr per day ). its also proportional increase at NSE as well. May be lock down has increased the trading volume.
Derivative volumes are nearly 30k Cr everyday. Though this looks high, its the notional turnover of the options. Futures are only at 2.3 K Cr or so… also BSE volumes come from prop trading… so not sure that this will continue once LES ends…
Discl: I have reduced my positions compared to my previous post… but I still hold about 4% in my portfolio.
Hi Rajan,
Yes, I have seen the number crunching in the thread by you and it really gives idea about the situation on the ground about Star MF. I agree with you that they are not having the pricing power for now. The financial planner I spoke to told me that NSE MF platform is easy to use but if one is little tech enabled BSE Star MF makes life very easy for them. I assume it provides some value added services like writing some query or giving mass processing options or flexibility with date but not sure.
See the link below where an IFA who was using BSE StarMF to process SIPs more than 1000 in a day was approached by NSE MF and he processed 93 SIPs in a day.
https://www.morningstar.in/posts/58277/ifa-clocked-93-sips-single-day-lockdown.aspx
Now, why BSE Star MF is lowering the rates? May be Star MF realised there is no real moat here and making the distributors getting used to BSE Star MF can develop some customer stickiness to the platform. The other thing is about building trust. I saw a video from Saurabh Mukherjea where he is mentioning why Asian Paints will not just survive but thrive once the lockdown is removed. The reason being, they have set up a fund of 600 Cr to support liquidity for their dealer during this difficult lockdown time. So, after the lockdown is removed and once the pent up demand picks - they all will remember Asian Paints rather than competitor. Like @Adhiraj mentioned in the earlier posts, they have a mighty competitor in the form of NSE with 10x cash lurking to take away the market share. I leave it to BSE how they handle this.
As far as I understand, they are developing market for INX with incentives. There are many advanced financial instruments for hedging.like basket options, knock out and knock in options, exotic options, currency swaps etc. We did not even scratch the surface of currency options market. See the below link on what else they are trying.
Cyclicality comes into picture only after we see everything on the table. Like Graphite India and HEG - Graphite electrode single product follows cycles
Having said all this, Mr. Chauhan himself agreed that they had to lobby for years to bring some changes in the regulation and then once it is implemented they understood that they lost some more market share to NSE. That’s the reason why I see his ways as PE investment style. Some click and some don’t. For me, I have time on my side.
Disclosure - I attended “Basic Course on Stock Markets” by BSE Training Institute and then as part of their training material I came to know about the advanced derivatives. BSE Training Institute operates on the 18th and 19th floor of the Iconic BSE building.
Hi members,
Was trying to understand the optionality baked into INX. I understand that the management has stated they cannot charge until the competition does. I am not sure whether to take their market share values at face value or not. They have an incentive to choose the metric to use in market share calculation.
So whenever the chance comes to monetize INX, say sometime in the next 5 years, is this the right way to look into it? INX has been doing an ADTV of around $ 2 Bn in the last 3 quarters. Checking equity cash contract notes on NSE, the exchange transaction fee is 0.0032% of the traded value.
Can we use this for a trading fee on ADTV?
If yes, that would translate to annual revenue of 120 cr today at USDINR of 75 and 250 trading days.
