HDFC has again proved to be a gentleman in the wilderness of indian corporates by being first to comply the SEBI circular on “Best Price” . It is disappointment to see the likes of Zerodha, Alembic, icici direct and Bob capital etc yet to follow the circular. This may give some help to BSE business.
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Zerodha has implemented long back.
Has anyone recieved dividend from BSE. Dividend was supposed to be credited on or before 28 th August.
Symbol: BSE
Subject: Intimation of date of Annual General Meeting and Record Date Dear Sir/Madam,
ISIN: INE118H01025
This is to inform that the Fifteenth Annual General Meeting of the Company is scheduled to be held on Thursday, July 30, 2020 through Video Conferencing and other Audio Visual means in accordance with General Circular Nos. 20/2020, 17/2020 and 14/2020 dated May 5, 2020, April 13, 2020 and April 8, 2020, respectively, issued by Ministry of Corporate Affairs read with SEBI Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79 dated May 12, 2020.
Pursuant to Regulation 42 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, record date to determine shareholders who will be eligible to receive final dividend, subject to shareholder’s approval, will be Thursday, July 23, 2020 and payment will be made on or before August 28, 2020.
This is for your information and record.
Received the BSE dividend on 05-Aug.
Shared some thoughts on BSE.
Wanted to retype again but would have taken a lot of time hence posting link
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Would it be fair to judge BSE’s profitability by removing all the investment income?
In my understanding the investment income comprises 2 parts:
- Interest Income earned on distributable cash on BSE’s balance sheet. So in other words, its own cash.
- Interest Income earned on member deposits/margin money/funds pending settlement, etc.
I agree with you that the first part (distributable cash) is not something that the operations have earned. But in effect, the second part should be counted as operational income and should be added to revenue. Based on your twitter thread, the encumbered funds are about 1200 cr, so if we take a 6% yield on this, the revenue apportioned to this should be ~70 cr. If you add that, the company is about breaking even
The other questions to ask is, is BSEs current profitability a fair estimate of the business earnings potential? The current P&L includes the following:
- One of the worst Small Cap markets of the last decade. In FY 18, trading revenue from exclusively listed shares was 80 cr which has in FY20 fallen to 20 cr. Probably 80 cr represented market froth, but I would argue that 20 cr is not a fair representation either.
- An underperforming IPO market.
- Investments being made toward new digital ventures which are not generating any revenue (LES in INX)
The way I look at it, the core business is actually profitable in a normal scenario. If you add 1700 cr of cash + CDSL stake value (I think a 50% holdco discount is not warranted since BSE has to divest to 15% in the next 3 years + CDSL has a high dividend payout ratio), one is not paying anything for the existing operations.
Current Market Cap seems an unfair valuation for just the core BSE exchange business. But lets for a second say that the core BSE exchange operations are worth 0. That implies that we are also getting some of the other ventures that they have seeded in the company for free: Star MF, International Exchange, SME Platform, Insurance Distribution.
What is the option value of these platforms?
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If i just take INX where BSE has 80+% market share. The total transaction volume done by FPIs on NSE is ~250 mn , on SGX: ~20 mn. So that gives a potential market size of 270 mn transactions. What if 40-50% of this were to shift to GIFT? This doesnt even include the INR/USD contract which has ADTV of $60bn globally.
No revenue from INX is being declared today. -
Star MF has been growing transaction volume by ~100% over the last few years and still is only ~15% of the overall market by volume. It is a business similar to CAMS. Lets see the value discovered for CAMS. We will get a fair sense of what Star MF is worth.
So in effect this seems to be a case where your downside is protected by the huge cash value and CDSL stake and we have significant upside in case any of the optionalities play out or if small-cap comes back into fancy which seems to be happening right now. And to boot, we are getting paid to wait in the form of a decent dividend yield.
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All these Star MF and INX etc, what is the Top Line and Bottomline they do. How penetrated are they.
I think STAR MF is fully penetrated and still isnt making an impact on bottom line. 75-80% Mutual Funds transact through it
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I think Star MF still has a long way to go. The platform did 5.75 cr transactions in FY20 whereas CAMS just by itself processed >30 cr transactions. So the opportunity size is huge and should be growing. Regarding profitability, I think the management has indicated in the past that it is a 60% EBITDA margin platform. Though I dont know if that still holds true after their recent price cuts. I think post the CAMS IPO, we will be able to value Star MF better. They are both similar platforms, help in transaction processing where value/transaction keeps declining.
INX, I think we have not even scratched the surface. The exchange did 45 mn transactions last year out of a market potential I estimate of 270 mn excluding USD/INR contract. I dont know if my estimate of 270 mn transactions is a good estimate of the market potential? Would love to hear contrarian thoughts there.
But global exchanges (SGX, CME) charge ~$0.2 for every futures trade and 0.05% on premium turnover. So the latent revenue potential of the exchange seems to be quite high, even if they are not charging for it yet.
I agree with you that if the optionalities dont play out, there is not too much upside to BSE. But another way to look at it is there is not too much downside either. So it is a case of heads I win big and tails I dont lose much.
Disclosure: Invested
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Couple of points
- StarMF-Management looking to divest stake to a strategic investor this was mentioned in the call and board as approved the same. this to me means that they are close to a deal. this should help value the business
- INX - they need to divest stake as per exchange regulation hence again valuation will come through
- there is a increase in cash volume this quarter as small caps have done well
- some SME companies listed on SME board are moving to BSE main board they may not move to NSE till they attract sufficient institutional interest this will help increase revenue
these are medium term triggers on price
there are some other things which are far away and depend on regulation - bullion exchange - it is in the works and both NSE and BSE are in fray along with MCX this is a monopoly platform
- listing of companies - this will be a game changer because of lower tax and transaction costs
some negatives
- it seems most of the volume on INX is of market makers and proprietary traders not foreign investors
- they continue to bleed money with every new incentive scheme to increase derivative volume they have not spent time to introduce innovative products except change in expiries. (this may be difficult but better to lose money in innovation rather than incentives which dont give any long term advantage) they have lost volume for all products once incentives were withdrawn.
- small caps which were main stays of BSE revenue are shackled with opaque rules on ASM etc.
Disclosure - Invested
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Interesting way to think about the exchange business
“I believe that execution is not particularly valuable… I think over time finding a buyer and a seller in a world where we have the Internet is really the most simple thing in the world, and networks can form up overnight to find buyers and sellers… And it was helpful to buy the New York Stock Exchange, because I think the New York Stock Exchange essentially is at zero. We don’t run it that way because it’s a whole big business. We don’t break out execution, but I don’t think there’s any money – I mean, we may lose money on execution if we were to really allocate cost. And how do we make the money? Data, listings, connectivity, information, catering, we print banners, I mean, everything around the execution is where we make money. And so that helped inform us that execution is probably in a digital world is going to go to zero.”
I don’t know how much money the New York Stock Exchange makes in catering or printing banners, but the other areas are certainly lucrative! More than that, these areas – together with the clearing businesses which sit in ICE – are the source of the exchanges’ newfound power
source
Bad news for INX. If all the SGX liquidity were to transfer to NSE IFSC, that too with legitimate foreign investors, it seems less likely that BSE will be able to compete and win out.
@harshil how did you get this data? Was trying to look for how much of the trades are due to market makers and could not find it on the INX website. Maybe i missed it.
YRM91,
i dont have hard data but got this from a friend who runs a broking company in GIFT
BSE results presentation out:
https://archives.nseindia.com/corporate/BSE_07112020184854_InvestorPPT.pdf
Most interesting aspect for me is the shareholding pattern: Zerodha broking has bought 1.63% stake in the company in the last one quarter. Views invited.
Disclosure: invested
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thats y now a days i see zerodha has made by default option as BSE … if you don’t pay attention u may end up buying on BSE 
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BSE would have posted a better bottomline today. Alas! The fine due to s&pDow Jones case pulled it down.
I see all major segments showing a growth. But, even after interoperability and SEBI asking brokers to use best price mechanism , NSE has an 94% maketshare in equitycash!
However, I could not trace their net profit frm BSE derivatives.
I am still curious to understand the underlying reasons for Zerodha broking to buy 1.63% stake in BSE. Zerodha is a modern and innovative broker that is growing substantially. They must be expecting growth in BSE vs the lacklustre past that BSE has. But - i am unable to understand what the growth drivers could potentially be. Am is missing something that Zerodha is seeing (or knows of).
i think this could be a financial investment… i think they also own CDSL… i would not read to much into it… as in they may not promote BSE F&O
Zerodha is the largest stock broker in India by customers. SBI is also a major shareholder in BSE. Why is their marketshare in equity cash still at 6% and reducing?
Why has SEBI’s push for best price execution not improved their market share even by a single percentage?
Saurabh, this is just speculation on my part. Zerodha uses BSE STAR MF for their COIN platform. They intend to introduce their own MFs soon. Maybe they see something here.
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Q2FY21 CCT Notes:
A few observations -
- BSE Star MF platform seems to be sorted now with AMFI on board. Management guidance is very strong for future growth but this could just be a marketing tactic for divestment.
- Majority of questions asked by individual investors, not a single big research house asked the questions. Don’t know if they were present. Lack of institutional interest is good.
- Informative comments on the competitive landscape, bullion exchange in GIFT, power exchange, and CFTC permission for foreign investors.
BSE Star MF
It may be recalled that BSE and mutual funds, through AMFI, were in negotiation with respect to the rates chargeable by BSE to them for processing of transactions through BSE’s StAR MF platform. After protracted negotiations, the rates have been finalized for all the activities and cost reimbursements, and taken into account while finalizing the results for the quarter ended September 30, 2020. It is expected that settlement of rates would now drive further cooperation with the mutual funds to explore and implement further avenues for providing value added services to the investors and intermediaries.
With growing acceptance of digital financial and non-financial transactions in India, big opportunities are emerging for extending various differentiated and value added services to investors of financial products. While BSE has already introduced value added services such as e-KYC and looks to commence commission distribution services in the short term, various other services such as handling non-financial transactions and distribution of various other financial products look imminent in near future. It is estimated that the transactions on this platform can grow at a compound annual growth rate of above 50%, with similar growth in gross revenues in this business over the next five to ten years. As applicable to any financial services, including transactions and revenues from value added services in this business is expected to increase the profit and net margin potential more than proportionally to the growth in business.
Appointed ICICI SEC to unlock value.
There are many different charges that happen actually, for XSIP and for the SIP and for lump sum, there are like 8, 10 different types of charges that happen, which are applicable to different types of transactions. And then we recently started the payment gateway services also, they are almost all mutual fund, I think barring one, have agree to not pay directly to the payment gateway providers but through us, because we have got them substantial discounts due to the volumes we provide. And some of that discount we have passed on to the mutual fund, so everyone has agreed to us. And that also was agreed with AMFI. So overall, I mean, there are multiple ways and multiple areas in which we charge. So, I wouldn’t be able to give you a specific answer to that question on exactly what we charge.
Revenue lower this Q because we had billed some revenue before the final settlement. We provided for it this Q. We had to reverse that Revenue.
The average realization basically in this half year has been around Rs. 5.3, and obviously we told you the reason because of the reversals.
Revenue from VAS has started in Oct. Currently only AMCs paying, when we start intermediating distributor commissions we might charge some portion to the distributors.
Equity Cash
ADTV increased by 44% HYoHY.
Equity Derivatives
ADTV increased from 7 cr in June to 161548 cr in Oct. Due to change in expiry day. This can complement growth in cash segment also.
India INX
90% ADTV from equity derivatives. 88% MS in derivatives. 99% in bond listing.
Currency
MS at 30%.
Commodity
Options in Goods gaining traction. 2nd largest commodity derivative exchange in India now. 3rd is 1/5th the size.
Q&A
BSE BOW will remain free. NSE’s NOW has given notice of closure. This is for retail brokers. SENSEX30 will get 50% from EPFO now. Earlier it was 25%.
When NSE started in 1994, the BSE’s transaction cycle used to be Monday to Friday, and then NSE did the off-setting and that’s how the NSE’s volumes increased. And that was the hope of many brokers, and they were asking us to do is offset in the trading cycles.
Still early days with the offset strategy. We got lucky. In investment phase. Cannot charge right now. Going after market share.
LES
I just wanted to mention an observation with respect to the equity derivatives liquidity enhancement. If I look at the option change for your SX50, it seems that most of the liquidity is being provided very far away from the spot prices, it’s almost like 10%, 15% away. Now, given that we are spending a lot of money to provide this liquidity, I think the management should probably try and speak to the market makers to provide liquidity near the spot prices. If we want this liquidity enhancement scheme to work over the long term and once we take away the liquidity, if you want genuine participation and volume, it has to be near the spot prices. But right now it’s almost 10%, 15% away. So my concern is, as an investor, that the day we take away this liquidity enhancement, the volumes will drop again substantially. So any comments by the management as to why are the market makers providing liquidity so far away from spot that this LES will not work if it’s not near spot prices, at least within the 2%, 3% range?
BSE has actually announced the market making framework, based on which people are basically placing orders in different, different. And that’s available, in a way, we have invited market makers to do it. So people give their offers and we select it. And for each in-the-money, at-the-money, out-of-money, there are basically frameworks through which within a particular band they have to give two-way quotes through the day. Contrary to popular perception, and what we have been made to believe, most of the times the transactions in the world markets actually happen away from the spot price. If you have to do trade on the spot price, then you would be better off in the futures, because there you don’t even pay the cost, the premium you don’t pay, right. So what is called delta close to 1, if you are a good options trader, you might understand this, delta equals to 1 where futures where you don’t actually end up paying premium is a much better framework than paying premium for options. Because once you pay the premium it goes away from your pocket, right? So all over the world, most investors who are smart, actually trade options for out of the money, deep out of the money kind of areas and not at-the-money. Some how in India we have been made to think that options are equivalent to futures, right. And that’s why many of us ask these questions. But the traders who are smart are used to trading in out of the money options. And even in NSE you can see huge amount of trade even deep out of the money for two, three years ranges earlier for a variety of reasons. So there are reasons for that. Second part is, the money being paid is not very large. Although sort of you might have perceptions, but you can also check it in our website, we provide all the numbers of how much money we pay per month for market making in the BSE’s options segment. So again, the statement is what I call value judgement, about huge money being spent. But basically the money being spent is only for the compliance of those two way quotes to be made in particular bands. At that’s what the people, are selecting to trading out of the money options, for whatever reasons they have, and probably internationally they do that way. And Sameer, my colleague who runs the markets, I mean, the business for us, he might have some comments on this. Sameer, you have any comments?
Yes sir, definitely. In fact, these strikes are also not being chosen by the exchange, it is dynamic in nature. And when the market maker selected is supposed to quote in all these strikes. But whether the trader or the member trades in particular strikes, is beyond our lookout. And nevertheless, they trade wherever the premiums are lower, so they can churn. This is what we understand from the market participants. There’s more churning as far as day traders are also very active.
In terms of the market makers themselves trading, that is not possible, because their trades have no relevance to the commission’s they actually, I mean, the incentives we provide to them. So that’s a perception you have in mind. The second part is, even if somebody is trading with their friend in the morning and reversing in the afternoon, those reversal trades are now automatically cancelled in BSE. In addition to self trades, this cancellation reversal trades also cancels automatically, BSE is the only exchange in the country, probably in the world, which does it. And that’s where I think in other exchange there this reversal of trades are still going on. And I don’t know, whenever the investigation is over, over last 10, 15 years, people will have a tough time basically answering to that, the way it happened on BSE’s e-liquid options earlier, right. So effectively, BSE does not allow self-trade or reversal in that sense. And incentives are pretty much not for that.
Competition
See, I will tell you, possibilities are immense, but NSE has been consistently acting as anticompetitive force and subsidizes all their activities where they are not successful. For example, in mutual fund, in bond distribution, in listing. Similarly, in the GIFT city also they are not charging, instead they are providing the liquidity support. We have no choice but to provide. And so it is basically NSE’s anti-competitive practices which is forcing us to do this. And not only in areas which we compete with them, but where we are hugely successful, and still they do it. And that’s where it’s more dependent on NSE’s inability or ability to stop doing that. Once they list, I hope investors will pressurize them to not act so difficult for everyone. And BSE has pointed out these anti-competitive activities of NSE in writing to SEBI, and we hope some actions are taken to ensure that the playing field becomes level.
This is a very, very good question. I think over the last 10 years you might have seen that BSE does not allow scandals to happen. While other exchanges are in some ways mired in scandals, right. Somewhere, someday, retail investors will start going towards nonscandal exchange, right. So that is one way by behaving nicely. Second is our technology. But our larger issue is that we are not able to directly have investors trading on us. They have to go through the brokers; and brokers, many of them have NSE as the default, or the only exchange available for even equities trading. And so it takes time for them to change. Of course, SEBI has come out with new regulation of providing best price execution. Till the time SEBI actually insists and start fining the brokers. It’s good to have a regulation, but if it is not actually followed up in enforcement, then that regulation is as good as not having it, right. And that’s what we believe that somewhere down the line basically, of course, the investors who are more alert, they may still want to trade on BSE because it offers larger number of shares and larger number of companies and all, and better technology, no scandals and other things. And of course, no settlement defaults. I mean, if you have seen over the last two, three, five years, we did not have any broker defaults or the thousands of crores which get lost of sort of investors on BSE. And hopefully, investors will be more interested in also doing good risk management for their own money. And that training will have to be given by brokers. But if brokers are not able to give, probably investors will learn by losing a lot of money on Anugrah and Karvy and all those things when they trade on other exchange, right. That’s how I see. It’s a bit of a B2B issue with us, whereas the trader is a C, right, so B2B2C. And our middle B is not able to provide our services or not offering or not making it the first available, then the investors will have to ask and insist. And for that we do a lot of investor awareness seminars across India, we do almost 8,000 investor awareness seminars in a year, which is largest in terms of the investor awareness seminars. But in a size of India, it’s again, very small. We have started now doing a lot of webinars because they are more effective. And hopefully, as you rightly said, the small investor doesn’t matter to him, whether he trades on NSE or BSE, because liquidity is sufficient on BSE for most times. But we continue to be hopeful that somewhere good behavior, good technology, good service, less scandal, less money loss for customers will convert into business someday. But sometimes irrational, or irrationality in the markets can run much longer than you think.
Thank you. That’s why I took this opportunity of your question to market BSE50 and all. Wherever an opportunity arises, we try to market. But you know, modern media is about money, it is not about news. So, person who can spend more money gets talked about more, and people who don’t spend more money or do not have more money, which is true with BSE, our profits and our transactions are not as well as what NSE has, so they get talked about because they have more money and they also spend probably, and that’s how of course that is a tradition also, where BSE lost out, in terms when derivatives were launched in 2000 BSE was not there for almost 15, 20 years, right. So, those are very issues we are grappling with. But hopefully, given the superior performance of BSE50 and also SENSEX30, and now sufficient liquidity, many of you will decide to come in, at least test and stay with BSE which basically protects your money much better than any other exchanges in India.
Bullion Exchange IFSC
Similarly, you talk about the Bullion exchange. India INX has written to us about the new regulation that the INX, I mean, GIFT City regulator has announced, IFSC Authority. And so we are going to take up with our Board with further details. And they are also trying to search for consortium partners who can be sort of participating in that consortium. Of course, this entire idea of GIFT City, Bullion exchange is of India INX, so they are more prepared, well prepared compared to anyone else. And there was a newspaper item also, not newspaper but a website item, that the authority this time wants to give approval to only one exchange, so that this cutthroat competition, negative competition doesn’t happen in at least Bullion spot. So in a way, the consortium might be the best way to go. And INX has approached the many participants and they have seen huge response from market participants and market infrastructure institutions. So let’s see how it works out. But clearly, BSE being the promoter and the largest shareholder of INX, will continue to provide whatever support that INX requires in even gold bullion, setting up of that exchange
Power Exchange
What happens is basically they asked for comments or appeal from other people, anyone in the country can apply against our license. So our current competition, IEX and NSE promoted PXIL, both went to CERC against us, and there were a lot of to and fro. Then last hearing, CERC, after two years of hearing them, they said, enough is enough now let’s go ahead. But in the meantime, we were told to comply with the shareholders guidelines, I mean, shareholding guidelines, so we took a lot of new shareholders, and now our issued capital has become larger and more shareholders have come in, and we are fully compliant with the regulations of CERC. But now CERC doesn’t have the judicial member or something like that, so they are waiting for that member to come in. And after that only they will be able to pass that order, because the Supreme Court doesn’t accept now the orders of regulators who do not have some minimum quorum or something. So that’s where it is stuck as of now.
CFTC Permission
So, there as of now immediately there is nothing that happens, but our brokers will be able to trade, basically take client orders from the U.S. customers, which they were earlier able to do only for the NSE derivatives, now they will be able to for BSE derivatives. So, hopefully, when we start charging, they become large and those orders come from them, in some ways, it’s like giving you a level playing field vis-à-vis NSE. Earlier on the NSE brokers had the right to take, so all the foreign investors were going there. Now, if some foreigner wants to come here, I mean a U.S. customer, if he wants to come here and BSE they can also trade, and as and when we charge then there will be revenue impact.
Volume could be large if some of them decide to basically come on the BSE platform. Because what happens is, each guy, I mean, there is one party which accounts for probably 10%, 20% of all the volumes in U.S. If one or two of them come then sky’s the limit, right. So if you look at NSE’s volumes also, you might think there are 2 crores investors trading. No, it’s 25 brokers and probably a few hundred clients that are actually trading most of it. That’s how this business works. It’s very, very concentrated business everywhere. So if some of them decide to shift here, that could be a very large opportunity
So since you made a representation on behalf of your member brokers, so can I read that as they themselves see that there is a potential demand from their clients to do it on BSE derivatives and hence they approach you to make the representation?
Correct. That’s how it works.
Free Cash
1400 crs.
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