Rajnikant Patel's exit turns spotlight on BSE hot seat

Incidentally, the meeting assumes significance, given the fact that it was the second board meet in the same month (the first was on July 12). This, according to exchange officials, was the first sign that something was amiss within the board. Officials also say that Mr Patel was “not attending office on all days in the recent past”.

Starting his career in the exchange as director (surveillance and inspection) in 2001, Mr Patel rapidly moved up the ranks to become CEO in 2004, succeeding Manoj Vaish who quit to join a market research firm. His meteoric rise notwithstanding, Mr Patel marks his exit from the exchange as yet another boss who has been unable to reverse the BSE’s flagging fortunes, from the time it lost market leadership to rival NSE.

The immediate challenge for Asia’s oldest bourse is to find someone who will be willing to pick up the baton from where Mr Patel has left. Given the unsavoury track record of board room conspiracies and the near-insurmountable gap in market share, it will require a braveheart to throw his hat into the ring.

The BSE desperately needs to carve out for itself a meaningful presence in the derivatives segment if it is to nurse any hopes of improving market share. Market-watchers feel some innovative product is badly needed, as the NSE scores way up on liquidity.

Combining cash and derivatives volumes on any given day, BSE’s market share barely works out to 10%. Its market share in the cash segment has remained constant between 35-40%, but its biggest failing has been the derivatives segment, where it has no presence worth mentioning.

The BSE’s benchmark index, Sensex, may have a better brand recall compared with the NSE’s Nifty. But it is the Nifty futures which institutional investors turn to for hedging their portfolio. The same holds true for traders.

A significant chunk of the NSE’s cash market volumes results from the arbitrage between the cash and futures market. To add to BSE’s woes, some of the recent changes in the margining system are expected to further erode BSE’s market share.

In May this year, the Securities and Exchange Board of India allowed cross-margining between cash and derivatives segments, under which an investor buying a stock in which he already has a short position in the futures segment will not have to pay the value-at-risk (VaR) margin twice over.

An investor would be able to avail of this facility only if both his cash and derivative market positions are on the same exchange. Since much of the derivatives trading takes place only on the NSE, more business is expected to shift to that bourse.

Other threats loom, but there are also opportunities if the BSE is willing to make a tectonic shift. The BSE should ensure that its failure in equity derivatives should not be repeated with currency futures trading which is expected to commence soon.

The exchange has to revive its Indonext platform that it does not lose these firms to a dedicated exchange for small and medium enterprises in future.