Democratising Capital

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The National Stock Exchange has galvanised India’s capital markets and catalysed change that has placed the power of trading literally at the hands of the people. Today it stands for highly secure, reliable, ultra-fast, convenient and democratic investment

In 1991, the government-appointed Pherwani committee recommended its creation, a reform whose time had come. National Stock Exchange was incorporated in 1992 and recognised as a stock exchange in 1993, and by October 1995, it became the biggest exchange in the country.

Before NSE; traders, who were brokers also owned, controlled and managed the stock exchanges. They traded through the outmoded and inefficient open outcry method. They had poor risk management systems and settlements took inordinately long.

According to Vijay Kelkar, Chairman of NSE, “Just a couple of decades ago, capital was controlled by a few large financial institutions that gave it out to their clientele, who were typically large, “established” firms. These institutions play it safe and typically focus on past performance and not so much the potential of the capital-seekers. One reason why the entrepreneurial class has grown in India is the easy access to capital it has enjoyed.” In the changed economic environment now, the market has issued capital to entities, who would not have otherwise been fin

anced by the traditional institutions. The new market mechanism has allowed the market to be anonymous and efficient and players in the market are less dependent on the old relationship-based systems. This shift has ‘democratised’ capital by making it more broadly available. The stock exchange, as a critical player of the securities market, obviously had a big role to play.


NSE’s objectives were clear: providing a nationwide trading facility; ensuring equal access to all investors; providing a fair, efficient and transparent securities market using an electronic trading system; and, enabling shorter settlement cycles and book entry settlement.

To bring in transparency, efficiency and depth in the market, NSE introduced a fully automated screen-based trading system. It enabled members from across the country to trade simultaneously with enormous ease and efficiency that led to the emergence of a pan-India exchange. It set up its own dedicated satellite communication network to provide connectivity to all its brokers who operate through their trading terminals in different cities. By taking steps to create a transparent, rule-based, state-of-the-art exchange, NSE quickly attracted liquidity and emerged as the largest exchange in India within a year of its existence.

Only about 10 percent of the households have exposure to securities market. It is recognised that it is just not enough to provide non-discriminatory, easy and low-cost access. In addition, there is a need to make potential investors capable of taking advantage of the available access. This is done through proactive measures to educate investors”
— Vijay Kelkar, Chairman, NSE 

The NSE was born at a time when the nation’s securities markets were monopolised by deeply entrenched brokerage firms, negligible transparency in operations and a near absence of retail investors. Essentially, it was an undemocratic, exploitative, dangerously balanced market, ripe for manipulation, scams and catastrophic crashes.

NSE is a completely automated limit order market, whose main contribution to Indian financial markets has been to incorporate forward-looking technology in the trading process and enabling equal and fair access to all investors through its electronic online trading platform. It played a pivotal role in implementing critical market reforms and establishing industry benchmarks in the adoption of best practices.

From day one, NSE has adopted the form of a demutualised exchange – each of its three key aspects—ownership, management and trading—is in the hands of three different sets of people. It is owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries and is managed by professionals, who do not directly or indirectly trade on the Exchange. This has completely eliminated any conflict of interest and helped NSE in aggressively pursuing policies and practices within a public interest framework. And in an innovative approach to trading, it eliminated settlement risks by setting up a settlement guarantee fund and reducing the settlement cycle. This was particularly useful after India’s largest financial scandal involving powerful and entrenched brokers and the settlement crisis they precipitated. It has also created an investment protection fund to compensate investors for financial damages resulting from member default, thereby offering investment protection to retail investors.

The exchange functions through three different segments – the Wholesale Debt Market (WDM), the Capital Market (CM) and the Futures and Options segment (F&O). The first, WDM trades debt securities such as debentures, government and corporate bonds, deposits, notes or commercial paper. The second, CM - is a screen based trading system for equities or preference shares, debentures, retail government securities, and Exchange Traded Funds (ETFs)—mutual funds that are traded on a stock exchange. And the third, Futures and Options, by their very nature, trade in derivative instruments including index and stock futures and options, interest rate futures and other credit derivatives.

The exchange has brought about unparalleled transparency, speed and efficiency coupled with safety and market integrity. When it comes to quality, standards and benchmarking, NSE has gone for the absolute best.

“NSE products are classified under equity products, equity derivatives and currency derivatives. Take Nifty, for instance,” said R Sundaraman, Senior Vice President, NSE. Its iconic Nifty is world renowned for stringent, research-based indexing criteria. Made up of the top 50 highly liquid stocks, Nifty is India’s main stock market index. Representing 23 sectors of the economy, these stocks make up more than two-thirds of India’s market capitalisation. That stood at more than http://inclusion.in/old/jm12/rs.jpg 57 lakh crore in May, according to NSE. Nifty is owned and managed by NSE and ratings firm CRISIL, through a licensing agreement with international ratings company Standard & Poor’s. “Investors holding stocks to hedge can use Nifty F&Os very effectively. It has become a successful product globally, and is highly ranked. Another innovative product we have introduced is the Rupee-denomination global derivative, allowing investors to diversify their portfolio sitting in India, and unaffected by the time and currency of trading.”

In 2010-11, the value of all the trading done at the exchange was nearly http://inclusion.in/old/jm12/rs.jpg 370 lakh crore. NSE’s market capitalisation of nearly a trillion dollars and 1,650 listings, places it at number 16 amongst the world’s largest stock exchanges, and third largest in the number of trades in equities.

When we talk about access to market, we talk not only about those seeking capital, but also those seeking to invest. Democratisation of capital creates opportunities for a wider distribution of wealth: farmers in the North-East can get returns on their investment in the best companies of the country; an employee can get a share of the profits of his company and almost anyone can benefit from the India growth story”
— Ravi Narain, Managing Director, NSE 

“Keeping the investor in mind, the market has evolved in two significant ways—one is about access and the other about products. From the physical location of the stock exchange, trading has moved into the comfort and confines of the trading member’s home. Secondly, the need for collective investments has given rise to mutual funds that you can now trade through the exchange,” says Sundaraman.

In a sense, NSE has revolutionised trading in stocks by completely eliminating the premium on location and proximity to the exchange. Instead of the trader coming to the exchange, the exchange went to the trader, by using satellite-based technology and placing trading terminals at traders’ offices. NSE took it one step farther by taking trading to the homes of investors—it introduced Internet-based trading, which allowed investors to trade comfortably from their homes. It then introduced mobile trading, through its WAP application.

“NSE’s members have multiple trading terminals all across the country. It is interesting to note that 70 per cent of these terminals are located in non-metro, smaller towns and semi-urban areas,” says Ravi Narain, CEO & Managing Director, NSE. Using cutting-edge IT tools to deliver a transparent trading, clearing and settlement mechanism, NSE has reformed the securities market’s microstructure, practices and trading volumes.

“Now we have access in almost every single district of the country and we have almost 200,000 terminals located in almost 2,000 towns and cities across the country,” says Ravi Varanasi, Senior Vice President, NSE. To ensure that the right kind of people come to the market, aspirants have to undergo testing and pass a certification programme. Further, NSE charges lowest fees anywhere in the world. “Our strengths are technology, our people and our processes. We always keep the customer as our centre. In 5 years since inception, we changed the market from being entirely paper-based, to entirely paperless. About 2 per cent Indians are trading directly. Our aim is to take this number to at least 5-10 per cent over the next 5 years,” echoes Varanasi.

NSE’s nationwide electronic market is backed up by robust IT architecture. “Every single thing we do is driven by technology—on any given day we process about 400 million messages in a span of 6 hours—by far the highest volume of transaction processed in the country. This is because we have millions of users nationwide—any town with a population of more than 10,000, has at least one NSE terminal for trading. On any given day, we complete 10 million trades. Millions of people are investing as they have an opportunity to invest now, which they have never had before,” says Ravi Apte, NSE’s Chief Technology Officer.

NSE is the first exchange in the world to use satellite communication for trading—through nearly 2,700 VSAT-connected computers in more than 200 cities. Sitting anywhere in India, a user can point the dish antenna at a precise point in the sky and connect with a satellite, say, India’s INSAT 1C. Once that connection is established, he then connects his computer to the antenna. The satellite connects the user to the NSE’s main trading server. What would otherwise have taken a fibre optic cable, modem, and an Internet connection, is accomplished using the dish antenna and the satellite. Once connected, the satellite opens a two-way communication between the user sitting on the ground, and the stock exchange’s trading server in Mumbai. From far away, a broker can trade at the NSE, in real time. 

Satellites fill the gaps in cabled or wireless communication facilities, such as broadband and mobile phones. Once broadband becomes more widely available nationwide, and mobile phones saturate the Indian terrain, VSATs will become less and less rampant. NSE’s upgraded trading hardware can handle up to 15 million trades per day in the capital market segment. “There is a member in a mountainous place called Lumding, perhaps a 100 kms from Nagaland’s capital Kohima. Using a VSAT, he caters to the investment needs of the local community—a small example of the big change we have brought about,” adds Apte.

We have a sophisticated, fast and highly reliable post-trade risk management system, which looks at the portfolio of the investors and calculates the margin to be charged for the trade. The NSCCL is a clearinghouse that both buyer and seller trust, as it ensures that the seller really has the instruments for sale, and the buyer also has the ability to pay. The settlement essentially has to be as fast as the main trading engine and also stringently quick” 
— Chitra Ramkrishna, 
Joint Managing Director, 
NSE and Managing Director & 
Chief Executive Officer, NSCCL 

Trading at the NSE has become even more simplified. Since everyone may not have access to VSATs and therefore, may not be connected directly to the trading servers at the exchange, there is Internet for those willing to trade. How it works is that registered members place their orders online with members who are connected to the NSE server. In a hub-and-spoke network, the members connected ‘live’ to the real-time servers of the exchange, receive orders from those who are far away, or connected only through the Internet. The connected members execute trading on behalf of traders who are connected to them online. “We have highly reliable, fault-tolerant, triple-redundancy computers. In a standard computer you have a CPU, memory, hard discs and other onboard systems. In our case, we have everything in triplets within the same equipment, so that if any one component fails, there are two more to take over seamlessly. We also have a highly structured disaster recovery mechanism in place that automatically takes members to a safe site. We are very sensitive about security and spend a lot of time in making sure the trading environment is secure,” emphasises Apte. Democratisation means there are no privileged traders and no unprivileged ones, access is available to everybody. To invest or not to invest may be an individual decision, but it can’t be for want of access. “There is another important aspect to democratisation, especially in India’s context, where people’s incomes are moderate. In the West, typically, one lot of traded shares represents 100 shares. You can neither sell nor buy fewer than 100 shares each time you trade. This limits access to trading, especially if you want to invest, but don’t have enough money for 100 shares  at a time. But at the NSE, you can even buy one share at a time and keep buying more as your disposable income rises. This levels the playing field for everyone, and that is democratisation,” he says. What really takes trading to the people now is the NSE wireless application protocol (WAP) trading platform, meant for mobile phones. Developed alongwith Bharti Telesoft, and provided to SEBI-registered brokers, the highly secure application brings live stock trading to the mobile phone.

Before NSE brought in technology to democratise trading, the bid-offer spread was wide open, running into hundreds of thousands of rupees, depending on the value of shares. In the simplest of terms, a bid-offer spread is the price at which a seller wants to sell a share and the price that a buyer offers for it. Because there was no transparency, and no real-time technology, the difference between the price asked and the price offered was enormous. Now, it is just 5 paise, yes, just 5 paise! And that has been possible only through honest transparency and technology. Unlike in the old days of traders standing in the ring and gesturing with their hands, people now check prices on their computer screens and trade. The system is so fast that by the time you have pressed the ‘Return’ key and looked up, the trade is filled—instantaneous, for all practical purposes,

“Since all trading is electronically logged, if we want we can go back to the last bit of any member’s transaction, correct it, bring the member and the client together, and ensure that investors’ interests are protected,” adds Varanasi. Through the National Securities Clearing Corporation Limited (NSCCL), its clearing, settlement and risk management arm, NSE has put into place a constantly monitored and upgraded, comprehensive risk management system, to pre-empt market failures. To ensure that traders’ obligations are commensurate with their net worth, NSCCL checks their track record and net worth, monitors their exposure in the market, collects margins from members and automatically disables them if they breach limits. These capital adequacy requirements for trading members and risk management methods have brought the Indian financial markets in line with the best in the world. “We have a sophisticated, fast and highly reliable post-trade risk management system, which looks at the portfolio of the investors and calculates the margin to be charged for the trade. The NSCCL is a clearinghouse that both buyer and seller trust, as it ensures that the seller really has the instruments for sale, and the buyer also has the ability to pay. The settlement essentially has to be as fast as the main trading engine—so stringently quick, that if a member’s last trade had breached the settlement deadline, or margin, he would not be allowed to trade anymore. By trading beyond his margin, he puts the entire system at risk. We can take action in milliseconds of someone having breached his margin, or limits. NSE has put in place such stringent post trade risk management system,” says Chitra Ramkrishna, Joint Managing Director, NSE and Managing Director & Chief Executive Officer of NSCCL. 

The National Stock Exchange is now on the verge of establishing an exchange for the small and medium enterprises (SME) of India, to create broad asset classes and to deepen the financial markets so that households have access to a variety of savings and investment opportunities. “We have created a platform with a reach across the length and breadth of the country and on which a broad range of investible products are offered for industry and investing population,” says Narain. It stands to reason, because SMEs play a vital role in the economy. Together, they generate 45 per cent of its industrial output, 40 per cent of exports, and employing 60 million people, according to the Small and Medium Business Development Chamber of India (SMBDCI). It says India’s approximately 30 million SMEs create 1.3 million jobs every year and produce more than 8,000 products for the domestic and international markets. In 2011, SMEs contributed 17 per cent to the gross domestic product (GDP), and this year, the figure is projected to reach 22 per cent. A study last year by ratings firm CRISIL on the funding patterns of 2,000 SMEs, said that there was scope for banks to increase their lending to SMEs by http://inclusion.in/old/jm12/rs.jpg 500 billion.

Every single thing we do is driven by technology—on any given day we process about 400 million messages in a span of 6 hours. Any town with a population of more than 10,000, has at least one NSE terminal for trading. On any given day, we complete 10 million trades. Millions of people are investing as they have an opportunity to invest now, which they have never had before”
— Ravi Apte, 
Chief Technology Officer, NSE 
 Investors holding stocks to hedge can use Nifty F&Os very effectively. It has become a successful product globally, and is highly ranked. Another innovative product we have introduced is the Rupee-denomination global derivative, allowing investors to diversify their portfolio sitting in India, and unaffected by the time and currency of trading”
— R Sundaraman, Senior Vice President, NSE
 
 “SMEs are crucial not only for economic growth, but also for inclusion, and any move to reduce their constraints is a move to further both growth and the inclusion agenda. NSE has set up EMERGE, a dedicated platform that encourages SMEs to enlist. It symbolises the aspirations of a large number of entrepreneurs and has the potential to unlock value”
— K Hari, Senior Vice President, NSE

“SMEs are crucial not only for economic growth, but also for inclusion, and any move to reduce their constraints is a move to further both growth and the inclusion agenda. NSE has set up EMERGE, a dedicated platform that encourages SMEs to enlist. It symbolises the aspirations of a large number of entrepreneurs and has the potential to unlock value and allow them to emerge on a bigger stage,” says K Hari, Senior Vice President, NSE. He says, NSE will hold awareness sessions to educate and sensitise SMEs towards the stock exchange and investing. NSE has designed a special diligence programme that will help SMEs assess their structures and processes and take corrective action before approaching the primary market.

“A stock exchange is one of the most fundamental institutions that provide the foundation for the growth of democratic capitalism, which is characterised by: a market economy based predominantly on democratic polity, economic incentives through free markets and a cultural system that encourages pluralism, says Ramakrishna. As the countries around the world embrace democratic capitalism, the significance of exchanges grows since they provide equal access to people regardless of their social and economic background.  “This characteristic of exchanges has facilitated the emergence and growth of a new entrepreneurial class, whose energy and innovation has helped several economies around the world to become more and more private sector led and diversified,” she added.

Narian says that when we talk about access to market, we talk not only about those seeking capital, but also those seeking to invest. Democratisation of capital creates opportunities for a wider distribution of wealth: farmers in the North-East can get returns on their investment in the best companies of the country; an employee can get a share of the profits of his company and almost anyone can benefit from the India growth story. He says the key word is access, and it has four important aspects—access for everyone, widely distributed, easily available, and at an affordable cost. Of course, protection remains integral to all these. 

Our customer is our number one focus. We constantly challenge our people with critical assignments, give them the right work environment and precise development inputs. Our attrition rates have constantly come down, and stand at a healthy 10 per cent”
— Chandrashekhar Mukherjee, Vice President, NSE

In a truly democratic manner, the exchange allows everyone to trade, invest and benefit. And since members are the only ones dealing directly with exchanges, their selection is rule-based and non-discriminatory. Technologies such as the screen-based trading system (SBTS) and VSATs allow market participants, irrespective of their geographical location, to trade. While SBTS took the trading platform from the exchange hall to the computer screen, Internet-based trading has taken the business to investors’ homes and phone-based applications have placed the power of trading literally in the hands of the people.

“Only about 10 percent of the households have exposure to securities market. It is recognised that it is just not enough to provide non-discriminatory, easy and low-cost access.  In addition, there is a need to make potential investors capable of taking advantage of the available access. This is done through proactive measures to educate investors,” adds Kelkar.
“We will launch a massive awareness and training programme in the coming years to take these products to investors’ doorsteps. Awareness is the key, and that is what we are focussing on. When people know, they will ask for products and services to track their savings and investments,” says Varanasi. To inform, educate, stimulate and inspire people to harness the immense potential of this opportunity, NSE has launched a major drive to create awareness nationwide. “Financial literacy is aimed at people who are already a part of the system. For this, we have identified different types of people—those who have savings but may not be aware of our products; those who trade but may not be up-to-date; and, the youth, who are earning, saving and getting ready for investing. For each of these segments, we have an education programme. We use multiple channels—onsite training platforms, the Internet and mass media. To each segment and type of potential investor, housewives, retirees and government workers, for instance, we speak of how financial planning can help them invest safely and take their savings far,” says K Kamala, head of NSE’s financial literary programme.

Through seminars, workshops, brochures and handbooks, it educates investors as well as the financial greenhorns. “We offer financial literacy free of cost, any investor can approach us and we will facilitate it. We have certification courses, which we offer through online test administration. More than 1.3 million NCFM tests have been taken by students, market participants and investors. NCFM helps people build skills required by regulators to become intermediaries and hence, improve their income earning capacity. We are also closely working with management schools to cover this as an important subject. Investment is also about forming a disciplined habit. To cultivate this habit early, we work with several schools nationwide,” says Kamala. Through the government of Tamil Nadu, NSE offers financial literacy courses to high school students at more than 200 schools in the state. In collaboration with the Central Board of Secondary Education (CBSE) and Maharashtra Knowledge Corporation Limited (MKCL), the exchange runs formal on vocation-oriented courses on capital markets.

The National Stock Exchange is not just about trading, investing and maximising. It is a fine place to work as well. “Our customer is our number one focus. We constantly challenge our people with critical assignments, give them the right work environment and precise development inputs. Our attrition rates have constantly come down, and stand at a healthy 10 per cent,” says Chandrashekhar Mukherjee, NSE’s Vice President, HR.
For the world’s largest democracy, it is fitting to have a stock exchange that truly facilitates democratic investment and development opportunities.

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