Madan Sabnavis
The Mumbai-Pune expressway would possibly be 1 of the very first such passage for commuters on this route. Everybody agrees that it is a wonderful road to drive on. The option route is the old Pune road, which charges a reduce toll than the expressway. The toll on the expressway is Rs 270 for a auto. Is this the suitable toll? One does not know, as it is a monopoly and the charges could sound arbitrary. Thus, a improved strategy would be to have several expressways that will assure fair-play and right price tag discovery. Unfortunately, there is no way to have 2-4 expressways on the identical route, it charges income and space, and ideally, the government would like to deploy the funds to other routes. This is the challenge with infrastructure.
How about monetary infrastructure? Here, the price of entry is regulation and technologies. Sebi has not too long ago addressed the very first for the segment of monetary infrastructure it regulates, by opening the gate to have more players in the market place. The rationale is that there will be more competitors and higher leverage of technologies if there are more stock exchanges. The recommendations on ownership pattern of exchanges and depositories have been place out for discussion. Sebi points out that there are numerous circumstances of fintech players bringing in disruptive technologies and difficult the current players, therefore, adding worth. If this had been so, then there is a robust case from the point of view of the trading company to get more players. Unlike physical infrastructure, exactly where there are logistical problems, the identical does not hold for monetary infrastructure.
The logic behind possessing more players in any field is compelling since it fosters competitors and consumers achieve with reduce price and comfort of transacting. Therefore, there can be no argument, from the regulatory viewpoint. of stopping more players in the arena. The point of contention, nonetheless, is whether or not this will work.
There can be more players interested in joining the bandwagon, but the broader query is whether or not they will succeed. Bringing in technologies in a properly-established market place is 1 factor, but applying it to wean away consumers from current properly-entrenched players is fairly a challenge. Hence, it is intriguing to see how the case of new players has worked in these markets.
If 1 appears at the history of stock exchanges, the BSE and regional stock exchanges (23 at 1 point of time) had been the only ones ahead of the NSE came along. NSE came as a breath of fresh air in 1992, with a expert structure and open membership. The point of differentiation was technologies. This was also the time when the technique went into the dematerialisation mode post-1996 with the establishment of NSDL, and later CDSL, in 1999. This brought about a sea modify in the company.
However, BSE was slower to respond, and NSE was in a position to take a comfy lead in each the money and derivatives segment. As of FY20, in the money segment, NSE clocked total company of Rs 90 lakh crore, compared with BSE’s Rs 6.6 lakh crore. The most recent entrant, MSEI, had volumes of just Rs 28 crore. Quite clearly, liquidity is concentrated in two exchanges, with the dominant 1 getting way ahead. The quirk of markets is that liquidity brings in more liquidity, and therefore any new player has to face a challenge in the market place.
The forex derivatives market place was established to provide a vibrant hedging platform for firms with forex exposure. Three exchanges are active right here, but once more the image is lopsided. In FY20, NSE clocked volumes of Rs 96 lakh crore in the F&O segment, although BSE had Rs 68 lakh crore. MSEI managed just Rs 45,000 crore. Therefore, the very first-mover benefit remains with the protagonists, and new players come across it a struggle.
The commodity market place is a further instance of such concentration. The commodity futures market place was opened in 2003 when MCX and NCDEX had been established. Both exchanges came in when there had been regional exchanges (22 at 1 point of time) of which 1 got converted to a national level multi-commodity exchange. Seventeen years down the line, the regional exchanges have closed down, and there are only 3 of them left. Their level of volumes is so disparate. MCX had volumes of Rs 84 lakh crore in FY20 specialising in metals, bullion and power, although NCDEX, with substantially reduce volumes (Rs 4.4 lakh crore), is regarded as more of an agricultural exchange. In truth, volumes in the agricultural merchandise segment are just 5% of the non-agricultural merchandise.
ICEX remains a fringe player, with the company of just Rs 40,000 crore. There have also been new exchanges which had to shut shop due to the non-viability of their company model (ACE Derivatives and Commodity Exchange and Universal Commodity exchange).
Interestingly, each BSE and NSE have opened their commodity wings. However, in terms of company generated, they have minimal exposure at Rs 46,000 crore and Rs 6,300 crore, respectively. It has been observed in all nations that there tends to be a concentration in liquidity in commodities in particular exchanges which after established is tough to shake off. The monopolisation increases more than time. This has also been witnessed in overseas markets and is not particular to India. In the case of NSE and BSE, which are properly-established stock exchanges, diversification is an thought which will not influence the enterprise as the primary region of equities continues to tick. A new player will be really disadvantaged in such a setting.
The positions of the two depositories tells a related tale. NSDL had about 21 million accounts as of November 2020 whereas CDSL had 28 million. The total dematerialised worth of firms with these two depositories was Rs 160 lakh crore and Rs 16 lakh crore, respectively—CDSL is just 10% of NSDL. With such dominance of the two players, can there be a meaningful company for new participants even if they possess superior technologies, which reduces charges and offers a improved knowledge? The answer is possibly a no since even if incrementally there could be some movement, it is unlikely for current consumers to shift to a further service provider.
The thought to bring in more players to stay clear of concentration is in the suitable spirit as it is probable that consumers are not obtaining a fair worth for their participation on the exchanges or dealing with depositories. There could be interest in such new enterprises as the response to any regulatory modify is usually met with enthusiasm. The broader query is whether or not or not these new firms have the wherewithal to pull the enterprise as it could take even a decade to break-even.
The temptation to withdraw can’t be ruled out. The banking knowledge has been mixed in the final two and half decades. Those players in the fintech space could have the suitable model, but could not be in a position to achieve a great deal on marketing and advertising, in particular when confronting properly-established players and could just be searching to sell at a excellent valuation. This is some thing which has to be kept in thoughts when granting licences.