India is in a sweet spot to take advantage of demographics and technology

"A champion administrator and a regulator at heart is what it takes to lead the Asia’s oldest and one of the largest & fastest stock exchanges in the world!"

Stock exchanges and the indices are perceived to be the economic barometers of any country. There is no better person than the man with many talents, who is heading the Asia’s oldest stock exchange and one of the world’s biggest stock exchanges, to talk about the prospects for the Indian economy. The champion administrator that he is, Mr. Ashish Chauhan is a regulator at heart, whose only aim is to facilitate wealth creation for the masses in India.

In this exclusive interview with Dalal Street Investment Journal, Ashish Chauhan talks at length on various topics including the growth strategy that has worked for the BSE and the right approach that investors should adopt while participating in the markets. With an open mind, Mr. Chauhan talks candidly about the hits and misses of the BSE and the direction in which the oldest and the fastest stock exchange is headed in coming years.

With so many things happening at a scorching pace in the financial world, it is indeed remarkable to stay on top of all the issues that can impact the financial well-being of so many investors. Indeed, the alacrity with which the regulatory job is done at BSE is what allows millions of investors in India to repose their trust in the financial system. With BSE comes the reputation and the legacy, with Ashish Chauhan comes the competence, vision, strategy and execution. Investors can definitely listen to his advice and feel safe investing and trading on the BSE.

What steps were taken in FY19 by the BSE management to strengthen its position as an exchange of choice in India and expand across borders. There were some attempts and also some strategic alliances that BSE has done internationally?

BSE will continue to provide support on technology and operations to any exchange worldwide that wants to take help from BSE or expertise that BSE has developed. But our main focus is basically to run incident-free, scandalfree stock market and help India do capital formation, create wealth and raise funds for the companies and that will continue to remain our focus.

What tools, i.e. data analytics-based solutions, are being used at BSE to detect and mitigate potential risks of market manipulation and rumours?

First, we do a lot of investor awareness seminars and almost 4,000 investor seminars through television and magazine like Dalal Street Investment Journal, we inform investors the "do's and dont's" of investments. Specifically, the 'dont's' like don’t believe in tips, don’t believe in whatsapp messages, don’t believe in SMSes, study yourself, it is your hard earned money, and ultimately you are responsible for that.

We also ensure that the information related to companies is tracked on a real-time basis across the world. We use social media platforms, information coming out of them, websites of various entities, including news, television channels and many other areas to see how the information about the companies that is not reported on the exchange is available. Through the use artificial intelligence, questions are asked automatically to the companies about whether they are aware of any such information and whether it is true or not. So those companies have to then clarify and whenever we ask a company, usually we also put it on the website so that everyone knows that we have asked this to the company. So, we provide education to investors, but we also keep track of the company related news that is not reported on the exchange but which the company is supposed to report. We have also created a website for the companies to report their material information and periodic information, due to which the difference between the time they report and the time it is displayed has come down to less than a second. It is available 24/7 so that anytime a company wants to report any good or bad information, it is available to the market instantaneously. These are the kind of steps we have taken as we think ultimately information is very, very important for the investors to take correct decisions and timely information on the exchange platform is what that makes us much more robust. We have a mobile application of BSE beta, which has been downloaded more than a million times and we have almost a million visitors on the BSE website, so it is 100 million page views. It is basically like most other countries where we provide these data for free. These are all easy to see and even in the order book, everything is provided so that they know what is happening in the market and if they want to buy or sell, at what rate they may be able to do that.

Is it true that BSE management is focusing on development of indigenous solutions? How is this helping the BSE? Are these tools developed in-house?

Most of the technology BSE uses has been developed with the help of other third party vendors like TCS and some other vendors. But, broadly speaking, BSE’s own employees are also involved. BSE has a large IT team and IT companies work under it as a part of the subsidiaries. So, many a time, skills may not be available readily or it may not have the number of people required at a point, so you may have to go outside. But our endeavour is to make a largely open source-related softwares which are easy to maintain and operate and lower in terms of licensing fees and maintenance fees, etc.

Last time you had said you are more of an IT company running a stock exchange. Is it still valid or has it changed?

It still remains valid because the technology has taken the forefront in the entire financial markets, so we are going to continue to be top-of-the-line in our technology.

How has the product and service diversification worked for BSE in the last one year?

Our mutual fund platform has become very large now. Almost 20 per cent of the net inflows into the MF industry and 40 per cent of the new customers in the mutual fund industry are coming through BSE. So that way, BSE Star MF has become very large over the last one year and has been well-accepted.

On the other side, the insurance distribution platform has not started because we are still awaiting the approval from the regulator IRDA for that particular venture, so when the approval comes, we will do that.

We have also launched commodities derivatives trading in BSE. We are seeing good traction in cotton trading. We have gained substantial market share within 12 days of launch, so those are the kind of successes BSE has got in recent times. Even for the sovereign gold bonds, we have started providing those facilities to the investors. We have also started providing bond distribution service to the government. We have also become largely corporate bond distribution with almost 70 per cent market share this year. So these are huge achievements over the last one year.

In the coming year, we plan to launch more commodities, both agriculture and non-agriculture commodities. The introduction of inter-operability of clearing corporation could be a game changer. It will allow trading on two different exchanges, but settle with only one clearing house and pay only one margin and settle only once. We will improve the ease of doing business immensely. SEBI has announced June 1 to be the deadline, so those are the kind of changes we are currently doing in our technology.

How is the focus on increasing market share of derivative products paying off for the BSE?

In currency derivatives, we have become a large section in India. In the agriculture commodities that we have launched, cotton has again become very large. In equity derivatives, we have not been particularly successful.

Based on the volumes, value of trades executed on the trading platform, number of active traders in the market, the number of new listings and the amount of capital raised through such listings, how will you evaluate BSE's performance on these parameters?

We have had almost the largest number of brokers on the BSE platform compared to any other exchange. We are now almost 21,000-plus IFAs as BSE members on the mutual fund side, which is also a very large number on a direct basis and almost 200,000 indirect people distributing mutual fund product on the BSE. So, we have seen a large uptick in the last one year in terms of people who are active and also new members wanting to become members of the BSE because of the recent success we have had.

BSE StAR MF platform has turned out to be a huge success. What triggered the popularity of BSE MF StAR platform? What goals have you set for this platform?

Basically, when investors trade on stocks or derivatives, the brokers usually decide. The investors don’t decide. That is, if a broker has kept some margin somewhere, they decide to trade there. Similarly, if a broker is connected to BSE Star MF platform or BSE IPO, and he finds it easier to do it that way, then he will push his orders in the BSE Star MF. In equity derivatives, we missed the bus. It was allowed in 2002, but we were not there for 10 years, so it is becoming difficult to bring back the volumes. But in terms of MF, both the exchanges started it almost at the same time. BSE started later there also, but because of the superior technology, BSE has been able to connect to most brokers and most IFAs, giving them comfort and providing services for faster money movement, so because of that, they prefer BSE.

What is your message to investors, all of whom seem to be lost since last one year?

Investment in stock market including MF is basically a risk-based framework, where ultimately you are investing into partnership for a company. So, if the companies’ profits are expected to go up, the prices would usually move up, or if the profits go down, the prices would move down. Sometimes, due to the demand-supply of money or the demand-supply of stocks, which moves up or down very rapidly, then you can see changes which are very rapid. Otherwise overall, the stock market investment is basically risk-based investment and an investor should understand its pitfalls or the risk associated with investing in equities or trading in derivatives. Derivatives are highly liquid instruments and if you do not know the details and if you do not have the financial knowledge or sufficient experience, it can basically become very difficult to handle losses. So overall, it is important to understand the nuances of each productive trade and the kind of risk profile you are carrying. If you are investing in very illiquid stocks, even if the company is doing well, the stock may still not do well, but if you are investing in a highly liquid company, but if you are not able to make profit, then you will not make much money. So there are various ways in which you can lose out and everyone should be aware of the do's and dont's. After tremendous amount of in-depth study, they may want to invest for the long term rather than for the short term because in the short term, if you trade very frequently, you end up paying a lot of brokerages and exchange charges and a lot of taxes, which may also lead to larger losses.

We also ensure that the information related to companies is tracked on a real-time basis across the world. We use social media platforms, information coming out of them, websites of various entities, including news, television channels and many other areas to see how the information about the companies that is not reported on the exchange is available.

Do you belong to that camp which suggests that the margin money amount should be increased to at least twice the amount from what it is currently. The argument is if you take a larger initial margin, then the small time traders or the small investors will shy away from participating in derivatives which is a speculative activity.

Basically, the way it works in most of the developed markets is those participating in the derivatives markets have to get themselves accredited. Only those net worth investors who are accredited by the regulator or such agencies can participate in the derivatives market due to their knowledge, their education and financial wealth. Otherwise, usually it is considered miss-selling in those advanced markets. Even in the evolved society which has become much richer than India they have put restrictions because most people don’t understand derivatives and the concept of leverage so well and end up losing money. So, in a sense, the world has gone in the direction that if you have higher risk, you have different types of investors based on risk profile and your education profile. You may be allowed to invest or not be allowed to invest, but if you still want to participate in such risky products, it is probably like not giving the knife in the hand of a child. It is very similar to that. And today, in the case of derivatives in India, we are hugely not bad at the ground level where so many people are trading and potentially putting themselves in grave difficulties. India has to finally go through more safe approach on selling derivatives to retail investors.

Please help us understand why should investor should prefer trading or investing on the BSE rather than any other stock exchange?

BSE is the oldest exchange in Asia and one of the largest in the world. With BSE comes the reputation.

Anytime you put buy or sell orders, BSE does it much better. If you take the last 10-15 years, BSE has the least number of brokers who have defaulted. Which means investor’s money is not at risk as much as it is with some other exchanges. Also, BSE has the largest number of stocks listed in the world and almost three times larger than the nearest exchange. So, basically, it gives you wider choices and better information. If you go to the BSE website, it is easier finding information. It gives you trade confirmation and order confirmation. You can check your order details on the BSE website if you want to check with the real brokers if the prices are correct or not. So, there are many advantages. Of course, BSE’s technology is the fastest in the world, so you get a faster response. The scalability of the BSE is much better than any other exchange and today BSE is also allowing you to invest in bonds, government bonds, gold bonds and mutual funds. BSE is now the largest mutual fund distribution platform in the country. So, even in commodity trading, equity trading, equity derivatives trading, currency trading, BSE is now the largest exchange in India. So there are many pluses why you would like to trade on the BSE. Also, the price differential between the BSE and other exchange would be minuscule, in most cases, 5-10 paise on either side, which means as a retail investor, you are not trading in lakhs and crores of shares. You are trading in smaller number and you should go for the exchange which is highly regulated and does not have any scandals and thus has better protection and provides better services to the investors and better information. 

If you take the last 10-15 years, BSE has the least number of brokers who have defaulted. Which means investor’s money is not at risk as much as it is with some other exchanges. Also, BSE has the largest number of stocks listed in the world and almost three times larger than the nearest exchange. So, basically, it gives you wider choices and better information. If you go to the BSE website, it is easier finding information.

Lot more illiquid stocks are seen on the BSE than other exchanges. Investors do feel these stocks are wealth destructive. Your comments.

This is a matter of past perception. The largest number of stocks, especially in terms of value that has fallen, is actually available on both exchanges and actually traded on derivatives. If you take a company that has fallen by 70 per cent in one day or 50 per cent on another day or 30 per cent on another day, you’ll see these are larger stocks available on both the exchanges. So the amount of the largest stocks that have gone down by 70-80 per cent are actually taking the value, because it may have 100 stocks with a market cap of Rs 5 crore each. So, the total market capitalisation becomes Rs 500 crore. Well, as you may have one stock with Rs 70,000 crore market cap and it falls by 90 per cent, then the investors wealth gets destroyed by Rs 63,000 crore, but it is several times larger than say 20-30 per cent going down from Rs 500 crore. So, Rs 63,000 crore is many stocks of Rs 500 crore put together.

Many times, people create perceptions to bring down the competition, but the investors need to be aware about where they lost more money. You will realize that you may have one or two anecdotal stories, but today you would have smaller stocks which are inherently illiquid, and liquidity is a function of the size of the equity of the company. So, if the size of the equity itself is Rs 2 crore, you can’t be trading Rs 20 crore a day. That’s why you consider them illiquid, but if they have the growth potential, then you might like to invest. If they do not have the growth potential, you should not invest. In terms of punitive actions we have taken against promoters who have not complied, in the last one year itself BSE has delisted more than 1100-1200 companies and the promoters’ shareholding not only in that company but also other companies has also been frozen.

So there are severe punitive actions being taken by the BSE and the SEBI together. Similarly, if a company’s price today is say Rs 10, for it to go up to Rs 40 in BSE’s excluded stocks which are considered illiquid, it would take a minimum of one or two years, but a Rs 10 large-cap stock to go up to Rs 100, it would take one or two days and then it can come down also by that much in the same time frame. It is basically because we get habituated to think that way and this habit has been created over a long period. But today, BSE does not allow a fast price movement in the smaller stocks. However, in the larger stocks, fast price movement is allowed because there are no price bands on both the exchanges. So, today, more wealth gets destroyed in the larger stocks and that is what people need to know and be aware of. At the same time, people have 20-year-old and 30-year-old stories to tell.

How are lower circuits helping investors? Many investors believe they can't exit when the lower circuits are applied.

It is similar to going on a road having a road divider. Otherwise, for every driver it is a larger road if there is no road divider. So, it is basically to ensure that accidents don’t happen. If you allow free movement of prices, then the prices will move much more, including declines, which is what we have seen in the larger stocks. The circuit filter or price band in the smaller stocks are much tougher and that’s how the daily, weekly and monthly kind of price bands work, so it doesn’t go over a particular price. If you do not know the company, if you haven’t studied the company and do not trust the company’s future, then please don’t get involved in the company based on experts or television or magazines or newspapers. If you have trust and you are a long term investor, then you can get involved in any company, and specifically in small companies. On the other side, look at the derivatives. Many people trade in derivatives also. Today, there are at least one lakh incidents in a year where the prices have moved up or down by 10 times in one day. Suppose yesterday it started with Rs 10, today it might become Re 1 in one day. One lakh such incidents occured in last one year and no magazine or no media wants to talk about it because it is derivatives. Today, derivatives trade 30 times more than equity. Equities is 3 per cent of the market, out of which the market cap of the small stocks is literally 150th part. So, effectively, we seem to give more importance to 0.05 per cent of the business, but 97 per cent of the business which is derivatives where all these things are happening, nobody seems to bother. So that tells you the focus people have on a particular situation, which is actually not of that much relevance. The concern which I have is why the so-called investors are not asking you these questions. So that tells you whether they are investors or not.

They must be losing a lot of money in the larger stocks or derivatives, but they are not telling you. They might be also neither traders nor investors, they might be just story-tellers!

What is your feel and take on the Indian economy? What is your view of the economy 5 years down the line?

The Indian economy like any other economy is going through a large transformation. India has its own particular uniqueness, so it will probably change much faster than other countries. Also, India has a larger opportunity to grow faster because it has a much larger youth population who learn newer things who produce newer things and also consume a lot of things. Whereas, the countries which are becoming old may not be able to consume much. That is why, internationally, there is a worry about the world slowing down in terms of consumption, because we can produce a lot, but if nobody consumes, then it doesn’t make sense. So that is where China is becoming old very soon and suddenly and putting a huge break in the overall inflation internationally and the overall expectation of inflation. This is because now the rate of demand for steel, cement, food, petroleum oil, everything has gone down because no one thinks China can actually absorb most of it as the youngsters are not there. Similarly, Europe has become old and Japan has become old and America is old. Effectively, the only large economy that is young is India and very technologically oriented. So, in the next 5-10 years, India is going to grow phenomenally as compared to the rest of the world. That is basically the story. At the same time, as the world slows down, it will also have an impact on the overall sentiments, but India’s better days are ahead for the next not only 5-10 years but 30-40-50 years. The demographics and technology are inter-playing and India is in a sweet spot to take advantage of those things.

Any challenge you see that could seriously hurt the growth projections?

I think India has underestimated its aspirations which are much lower. For me, the future is going to unfold much faster and the growth on any occasion will be in excess of even higher double digits. So, those are the days I think are going to come, if not in 3-5 years, but certainly in a 10-year horizon because of the fact that the wealth that is being created now is very rapid and sudden due to changes in technologies. Creating newer business which was not done before or older business in the newer way and the wealth that is created is immense. That is why the next 50 years is going to be very important for the mankind in terms of the wealth creation, but specifically for India, which lost out on large wealth creation framework in the industrial revolution. So, due to the information revolution, India is very well-placed and we are starting at a very low base, so the percentage can be higher. Therefore, a GDP of 15 trillion dollar for China to grow at 10 per cent is much tougher than India growing at 10 per cent on a 3 trillion dollar economy. So, I have no doubt in my mind that India’s better days are ahead of us for the next 30-40 years.