A super stock exchange with a combined market capitalisation of Rs 78,92,952 crore ($1.96 trillion as on March 21) which will rank among the top 10 in the world. Sounds a bit premature. The possibility of a marriage between BSE and NSE is an idea that is gaining ground at a time when global stock exchanges like NYSE and Euronext have merged to create a single entity.
"Integration is the way to go as only one of the exchanges can survive unless one of them reinvent itself," said financial analyst G Ramachandran.
Recent changes in the ownership structure of BSE could make a strong case for the merger. BSE has now donned a new
after its inception in 1875. Its shareholding pattern has changed with brokers selling their stake to Indian as well foreign financial institutions under a demutualisation process. Demutualisation is the process by which the broker-member owned stock exchange is converted into a public limited company. This makes it closer to NSE in terms of ownership structure, distribution network, technology and trading cycles.
Though NSE was started as an institution supported by the government with an electronic trading platform in 1994, it has surpassed BSE in trading volumes. BSE's trading volume in the cash market is little less than 50 per cent of NSE's volumes. In the derivatives (future) segment NSE clocks an average volume of 32,000 crore as against BSE's volume of Rs 600-700 crore. While NSE has a considerable lead in the derivatives market, BSE has advantages of having largest numbers of listed securities.
"The merger would be a bad idea for the market as well as the investor," said Dr RH Patil, chairman, Clearing Corporation of India and the first managing director of NSE.
Dr Patil argues that a NYSE-Euronext merger or a NYSE-Tokyo Stock Exchange tie-up happened because there are common scrips traded on these exchanges and an alliance helps traders to transact in them round the clock. But looking ahead when BSE or NSE get listed, they can be takeover targets. Though regulation at this stage prevents any such takeover attempts, the cultural differences might prevent an idea of an alliance.
"It will improve liquidity, but it will kill competition," said leading stock broker Motilal Oswal. The integrated stock exchange will have better liquidity and provide greater depth to the market. "Some day they will merge," said G Ramachandran, financial analyst. The combined entity can be a formidable challenge to the other Asian exchanges and would give it a great advantage as and when the rupee is fully convertible and global stocks are allowed to list and trade in India.
What is in it for the investor? Though for an investor it may not make much difference in transaction costs, if two exchanges merge, traders can cut costs. "We would save software costs, and more than that in back office operations and the compliance cost," said stock broker Sapan Patel. He is planning to use part of the cash he got by selling the BSE shares to buy a new membership on NSE so that he can service his clients better. One area where brokers like him could lose out is the arbitrage opportunity. Arbitrage opportunity in the cash segment has come down with both exchanges following similar trading and settlement cycles. But BSE members can take position in the F&O market on NSE and based on that trade in the cash segment of BSE. But brokers like Sapan Patel will have to wait bit before the merger could become a reality.