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Top Indian Bourse Fights Rivals With Retail, Volatility

NSE Lures Retail Investors to Fight New Rival
Pedestrians walk in front of the Bombay Stock Exchange in Mumbai. The NSE has a new membership fee of 500,000 rupees, while the BSE charges 250,000 rupees, according their websites. Photographer: Prashanth Vishwanathan/Bloomberg

National Stock Exchange of India Ltd. will offer products to lure individual investors and trade volatility futures to prevent MCX Stock Exchange Ltd. from ending its dominance of Asia’s fifth-biggest equity market.

The NSE plans to widen its range of fixed-income products, which include government and company debt, to attract so-called retail investors, Ravi Varanasi, the bourse’s head of business development, said in an interview on Sept. 6 in Mumbai. The NSE is awaiting regulatory approval to offer futures on India VIX, which gauges investor expectation for near term market swings.

“Retail services for both equity and fixed income, and high-end derivative products are areas of future growth,” Varanasi said. “We have multiple products at various stages of development in the pipeline.”

The NSE controls more than 90 percent of the nation’s $28 billion equity derivatives market and handles 75 percent of the stock trades. Competition is poised to intensify from November when MCX-SX, as the bourse is known, begins trading equities. MCX-SX had a 44 percent share of the currency-futures market in the year ended March, compared with the NSE’s 39 percent. One of its founders, the Multi Commodity Exchange of India Ltd., was the world’s third-largest commodity-futures platform by volume last year, according to an MCX factsheet.

“The NSE is facing a serious and credible challenge for the first time in its existence,” U.R. Bhat, managing director of Dalton Capital Advisors India in Mumbai, said in a telephone interview on Sept. 6. “It should act now instead of resting on its leadership position, which can fade away very fast.”

Membership Fees

MCX-SX was awarded its stock-trading permit in July, almost four years after it began operations. The Mumbai-based bourse said Sept. 5 it will charge members a total 2.5 million rupees ($45,130) to trade shares and equity derivatives, with the cost doubling after the introductory offer ends Oct. 18.

The NSE has a new membership fee of 500,000 rupees, while the BSE charges 250,000 rupees, according their websites. The NSE and BSE also seek deposits of up to 15 million rupees and 3 million rupees respectively, their websites show.

MCX-SX wants to sign up people located beyond the 2,000 cities and towns where stock-market access is available, the bourse said Sept. 5. The exchange will start trading equities around Diwali, the festival of lights, which falls in November, Vice Chairman Jignesh Shah told reporters in Mumbai today. The bourse will have its own equity index, he said.

“India needs to focus on spreading the equity cult and not just on trading,” Shah said. “We will focus on expanding the retail-investor base to deepen market penetration.”

Transaction Costs

The NSE has not stated whether it would revise its fees. The bourse’s share of the total transaction cost per trade is about 1 percent, which is “one of the lowest” levels in the world, Varanasi said.

“MCX’s transaction costs are 50 percent lower than our rivals,” Chief Executive Officer Joseph Massey told reporters today, without providing details.

The NSE plans to offer more fixed-income products in a move to appeal to a relatively untapped market of risk-averse individual investors, Varanasi said. Indian households had financial savings of 9.7 trillion rupees in 2011-2012, about half of which were invested as deposits with commercial banks, central bank data show.

“Fixed income is an area of significant possibility,” Varanasi said. “India doesn’t have a properly developed fixed-income market for retail investors.”

Government Bonds

The government-bond market is a “big area of focus” for MCX-SX, Shah said. “It is a big market.” India’s outstanding public debt was 37.5 trillion rupees ($676 billion) at the end of June, up from 35.8 trillion rupees at end-March, data from the Finance Ministry show.

About 25 million Indians, or 2 percent of the nation’s 1.2 billion people, invest directly or indirectly in the capital markets, according to a survey in July last year by the National Council of Applied Economic Research. That compares with 9.4 percent in China, 41 percent in Australia and 18 percent in the U.K., Thomas Mathew, a former joint secretary in the Ministry of Finance’s capital markets, said in an interview on Sept. 5.

Poor participation by individual investors has held back volumes on Indian bourses, Dalton’s Bhat said.

Trading this year in NSE’s 50-stock S&P CNX Nifty Index, at 28 billion shares, is poised to be the lowest annual level since 2007, data compiled by Bloomberg show. Some 3.8 billion shares in the 30-stock BSE India Sensitive Index changed hands last year, the lowest level in more than a decade.

An average of 672 million shares traded daily on the NSE this year, data compiled by Bloomberg show. That’s about three times the 229 million shares on the 137-year-old BSE Ltd.

Fund Flows

Increased activity by retail investors will help “counter inflows and outflows” from overseas funds and lower volatility, said the finance ministry’s Mathew. Inflows from abroad climbed to a record in 2010, making the Sensex the best performer among the world’s 10 biggest markets that year. The gauge had its second-worst annual loss in 2011 after funds withdrew $512 million, according to data compiled by Bloomberg.

Futures on the India VIX will allow investors to bet on or guard against swings in the Nifty index, Manoj Murlidharan Vayalar, a derivatives analyst at IIFL PReMIA in Mumbai, said in a phone interview.

“It will be an additional hedging tool to manage risk in their portfolio,” he said.

The India VIX added 3.5 percent to 15.3 at the 3:30 p.m. close, after sinking to a record intraday low on Sept. 7. The Nifty added 0.1 percent to 5,363.45, climbing for a fourth day.

MCX Commodity Exchange, which owns 5 percent of MCX-SX, in March became the first Indian exchange to sell shares. The sale was oversubscribed 54 times as investors bet the bourse will benefit from growing trade in gold, metals and farm contracts.

MCX accounted for 82 percent of the 44 trillion rupees of commodity futures traded in the March quarter, according to data from the industry regulator.

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