Regional stock exchanges (RSEs) thrived in the years when shares were traded in the form of physical certificates and an exchange's brokers were largely confined to the city in which it was located. Just two decades ago, for instance, there were 19 RSEs dotting the country with sizeable share trading being carried out through them. But the digital age, which made demat shares the norm, and also saw the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) expand operations across the country, has made their relevance increasingly questionable. Many traders and companies have preferred to delist from the RSEs and enroll with the BSE or NSE.
Only one RSE is making a determined bid for a comeback - the Calcutta Stock Exchange (CSE). "We have consolidated the exchanges of Ludhiana, Bengaluru, Madhya Pradesh, Jaipur and the OTC Exchange of India (OTCEI)," says B. Madhav Reddy, Managing Director and CEO, CSE. "The aim is to create a larger platform which will bring liquidity to the system." The exchange is in talks with a few other RSEs for amalgamation as well. It also intends to sell around three acres of prime urban land it owns along Kolkata's Eastern Metropolitan Bypass for around Rs 250 crore to Rs 300 crore and invest the earnings in improving its systems. It has already spent substantially in the last three to four years on updating its IT infrastructure, introducing a Bengali language website and tying up with the United Bank of India to offer online equity trading facilities to its customers.
Reddy believes institutions like the CSE are still necessary to increase the number of retail investors. "That will not happen with a bunch of big brokers, trading on the BSE and NSE, opening branches across the country," he says. "More platforms are needed and the CSE can play an active role in ensuring retail participation."However, the challenge is formidable, considering the CSE has practically stopped functioning. Some trades continue on the platforms of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) with which it has special arrangements, but they are small and few. It has been this way since April 4, 2013, when the Securities and Exchange Board of India (SEBI) barred trading on the CSE's online platform C-Star, until the exchange establishes a clearing corporation or ties up with an existing one, in accordance with the Stock Exchanges and Clearing Corporations Regulations, set by the SEBI in 2012. The CSE has so far been unable to do so.
There were other reasons too for the RSEs decline, apart from their inability to cope with the digital onslaught. Many of them - including the CSE - found it difficult to meet the increasingly stringent rules and standards imposed by the SEBI - such as the abolition of 'badla' trading - in its drive towards greater professionalism. The CSE, in addition, never really recovered from its payment crisis of 2001, an outcome of the Ketan Parikh scam, when 10 of its broking firms defaulted on their payments and the exchange's Settlement Guarantee Fund had to be resorted to. Until then, the CSE had a daily turnover of Rs 60 crore to Rs 90 crore (recorded in the second half of 2011/12); in its aftermath, with much credibility lost, this fell to less than Rs 15 crore to Rs 20 crore.
The CSE's annual membership fee of Rs 10 lakh as a base deposit is much lower than that of the BSE or NSE, which it expects to be an added attraction. Some of the proceeds from the land sale could also be used to buy a stake in a clearing corporation. The CSE has requested the SEBI to extend its May 2014 deadline by nine months, but has yet to receive a reply. "We are in correspondence with the SEBI," adds Dipankar Chatterji, Chairman, CSE. "Something will happen soon. "We are also waiting for new norms for clearing corporations which have been in the draft stage for two years."
Many analysts, however, are not convinced. "Merging with other RSEs is only a bid for survival," says B.L. Mittal, Chairman, Microsec, a Kolkata-based financial services company. "It is unlikely to add too many new companies or brokers. Many of them have already switched from the defunct RSEs to the BSE and the NSE. Even if the mergers happen, the CSE will not have the volumes to sustain itself. RSEs mean nothing today."On the other hand, a CSE broker, who preferred anonymity, says: "Most RSEs have lost their reputation because of vanishing companies, which listed on them, raised money through public issues, but little is known about them now." Investors are naturally wary. "That is a major reason for the RSEs' low liquidity and volume and their inability to meet the SEBI's criteria," says Kaushlendra Singh Sengar, Chairperson of research firm Incubators Group.
Some believe the CSE would be better off transforming itself into a commodities exchange. "The only way to save the CSE is to reorient its business model," says Mittal. "We need to change it to a regional commodities exchange to trade in potatoes, tea, coal, iron ore, steel, rice and mangoes. This will empower both farmers and traders." He believes using the income from the proposed land sale to set up warehouses would be wise. "Private companies could also set up warehouses," he adds. "Foreign direct investment will also come in. Farmers can store their produce in the warehouses and find markets online to sell in a transparent manner. They can also get bank loans against their warehouse receipts."
The choices are not many and time is running out. The West Bengal government holds four per cent stake in the CSE but has so far taken no initiative to save it. The CSE has heritage on its side, but that too is unlikely to help. It is the second oldest stock exchange in South Asia, begun in May 1908 - after the BSE, started in 1875. Indeed, some argue it is even older than the BSE, since it began functioning in the 1830s - under the shade of a spreading neem tree, not far from its current location at Kolkata's 7, Lyons Street - though it was formally incorporated much later. The future is, indeed, uncertain.
(The writer is a Kolkata-based freelancer)