Ramkrishna says NSE has already made small inroads into global markets with over 15 markets trading in ETFs based on the Nifty. But, right now, she thinks the opportunity is clearly in India, and her focus is to increase its footprint in newer areas of trading. The PE investors, so far, have nothing to complain about her strategy to grow NSE.

In the existing equities business, she feels the next push will come when the government eases regulations to invest savings such as provident fund, pension, and retiral monies into stocks. In developed countries, 30% to 35% of such savings come to the securities market, which fuel new products such as guaranteed return schemes, fixed income, and inflation-denominated products. “There is little progress in channelling indirect savings to the securities market—which should now be seen as an opportunity,” says Ramkrishna. Pension funds are the largest organised repository of public savings, and in India, the government does not allow these funds to invest in equity markets. The biggest investors in the U.S. markets are pension funds. She feels that allowing pension funds can immediately bring more long-term funds into the market, aiding liquidity and stability. She is working with the government to make this possible.

Ramkrishna says growing NSE will be a long haul, moving ahead as and when regulation permits. But that is not stopping her from exploring new areas. For the past three years, she has been working with the government to launch a PSU exchange-traded fund (ETF). An ETF is a tradeable fund that holds a basket of stocks, commodities, or bonds and trades close to its net asset value. Ramkrishna expects the government will find it easier to divest its stakes in PSUs as ETFs are more liquid than stocks. It is expected that the PSU ETFs will be particularly interesting to a foreign investor who wants liquidity. Though NSE’s ETFs are currently traded in 15 countries, the offtake in India has been poor compared to other developed markets. “We are stubbornly enthusiastic about ETFs,” counters Ramkrishna.

Ramkrishna argues that “there are no shortcuts in the Indian market”. Just as NSE’s forex trading picked up, rupee volatility meant new government strictures. Trading margins were doubled even as position limits for trading members were reduced from $500 million to $50 million. Clients’ trading limits were scaled down from $300 million to $10 million. In debt trading, NSE’s attempt to kickstart trading failed after two attempts when Sebi made it clear that institutions trading on the exchange would not be entitled to the settlement guarantee system. This meant that institutional clients would have to physically take delivery, no different from the current telephone-based order matching practised in the industry. Though the riders on forex trading are expected to be temporary, and NSE is already working to sort out the problems in debt trading, Havaldar says the process requires perseverance and patience.

Ramkrishna elaborates that the business of exchanges in India is different from other parts of the world. More than 90% of NSE’s income comes from trading and clearing charges compared to 50% for LSE. NYSE and LSE also generate revenues from selling data, and in a weak year for IPOs, nearly 15% of LSE’s income came from listing fees. Since there’s not much quality information available to investors, NSE doesn’t charge for the data it puts on its website—elaborate research reports on companies traded on the exchange are available for free. Similarly, with its high entry barrier for listing a company, NSE’s revenue from listing is also low. NSE stipulates that only companies with an equity capital of at least Rs 10 crore and market capitalisation of Rs 25 crore can list on it. NSE has only 1,672 companies, a third of those listed on BSE.

Abhay Havaldar, NSE board member and advisor to General Atlantic, says it is tough to innovate at the NSE as government regulations are just evolving in several areas, which Ramkrishna will wait out before starting a new business. The two things NSE has done successfully in the past have been its launch of equity derivatives and ability to deal with technology. When most other exchanges spent millions in buying software licences, NSE created its own. Going forward, Havaldar feels there is enough opportunity in new areas such as interest rate derivatives, forex, and debt trading, that can bring in revenues. The current average daily global trade in foreign currency is close to $6 trillion, much more than the $49 trillion of electronic equity trades that took place in all of 2012.

Kejriwal says, in recent times, brokers have begun litigating against the exchange as they think it has become heavy handed. Last year, a Mumbai trader punched in a wrong order by mistake, causing the market to crash. Under NSE’s own rules, if the market falls 10% during the day, trading should automatically halt for two hours to allow the market to cool off. NSE didn’t, neither did it allow the broker’s trade to be annulled. Two other such episodes have occurred since. Says Kejriwal: “It’s almost as if NSE is a black wall that cannot be penetrated.” NSE says it appointed a committee for each of the cases and thoroughly examined the circumstances before taking the decision not to annul the trade. Meanwhile, Mumbai-based broker Emkay Global, which put through the wrong trade, has appealed to the Securities Appellate Tribunal (SAT) against NSE’s decision.

However, the business of exchanges in India indicates that there is room for more competition if exchanges can innovate. In its three years in business, MCX-SX cornered half the market for forex trading, and within months of launching equity trading, its turnover touched Rs 300 crore a day, a tenth of what NSE traded. This month, BSE will launch its forex trading business, sensing an opportunity after volumes dipped in MCX-SX. Securities brokers are finding alternatives to NSE a pleasant change. Says Arun Kejriwal, founder of investing firm Kejriwal Research & Investment Services: “If BSE was a brokers’ club, NSE has started behaving like a bureaucratic club.”

A senior executive, who once worked in an international exchange, says globally exchanges have an incumbency advantage. If NYSE leads in equity, the Chicago Mercantile Exchange is preferred for commodities. LSE is preferred for bonds, while HKEx is quickly becoming a gateway to China. He adds that the Indian markets have been on the radar of NYSE and LSE, both for the exchange business as well as a market to scout for companies which can list on them. After Infosys listed on Nasdaq, Indian software firms began getting a lot more attention from international investors. Vedanta got a lot more international capital after it listed on LSE. As domestic companies globalise, there is a good chance that more companies will list in international markets to raise capital.

THE FUTURE WILL, of course, test her further. Despite the huge volumes of equity trades, the Indian market is still very small compared to the biggies. NYSE Euronext trades shares worth $14 trillion compared with a little over $1 trillion on NSE. Further, exchanges like NYSE have expanded globally either by buying or taking stakes in exchanges globally, like the 5% it had owned in NSE. The Shanghai Stock Exchange is already the fifth-largest in the world, while the older Tokyo Stock Exchange and HKEx are among the top 10. Lack of full convertibility of the rupee still makes foreign investment in India tedious, while conservative regulators here make the launch of globally popular products such as interest rate futures and volatility-based products tough. In other words, Ramkrishna has limited room to craft her ambitions.

Started to take on the eight-decade old BSE, NSE first offered e-trading in equities in November 1994, and edged past BSE’s trading turnover in 12 months. “In the initial days, BSE was so big that we didn’t think of competing. Our focus was to just get the trading platform and backend systems perfect,” says Ramkrishna.If Patil, her boss at NSE, revolutionised equities trading in India, Ramkrishna clearly understands that she is sitting on another big opportunity. Ever since NSE listed its derivatives product based on the Nifty overseas, the opening prices of Nifty Futures on the Singapore Exchange (SGX) act as a benchmark for its early trades in India. The volumes of Nifty futures on SGX are twice as much as on NSE, as global investors who want to trade in the Indian markets prefer to start off in the earlier Singapore time zone. NSE already trades the most cash and derivative equity deals in the world and continues to trade even as the London Stock Exchange (LSE) opens. Just like SGX, NSE could well become another benchmark for global investors. Ramkrishna admits that NSE may well be a prominent piece of the government’s efforts to make Mumbai a global financial centre, with its ability to bring in the best of the world’s financial institutions to trade in equity, currency, and debt, in real time.

Says Ramkrishna firmly: “It’s our pedigree. Dr. Patil taught us to focus on developing the market for trading rather than laying emphasis on any specific part of the business.” She argues that even if trading members complain about the exchange being puritanical about systems and processes, NSE will have to keep the broad market’s stability in mind to push through its regulatory function. Almost immediately she softens up and says intermediaries (brokers and sub-brokers) are important to extend NSE’s franchise. And they ultimately help make India more aware of equities—a topic her colleagues say she is very passionate about.

Wearing a blue-and-red checked silk sari and gold jewellery, Ramkrishna flits rapidly, between being like a light breeze and a gale force, depending on what you ask her. Ask her about competition, and the breeze suddenly gains force. Is NSE using its size and profits to stamp out competition? In 2010, the Competition Commission of India slapped a Rs 550 crore fine on NSE for predatory pricing in the foreign exchange market. It allowed traders to trade for free while considerably lowering market participation fees. This, at a time when rival exchange MCX-SX, promoted by Jignesh Shah, was launching forex trading. NSE has since appealed against the order as one member of the three who’d been chosen to judge the issue, had dissented. NSE also claims that when the complaint was filed by MCX-SX, it was the bigger player in forex trading, and, therefore, charges of predatory pricing did not hold.

Employees who work with Ramkrishna say she is highly focussed on work and travels incessantly. An employee who visited her company quarters in mid-town Mumbai was surprised at how spartan it was. Its floor had old fashioned tiles, the walls were mostly bare, with minimal furniture around. She is said to have a penchant for silk saris and understated jewellery though, not unusual for a Tamilian brought up in Chembur, a conservative middle-class Mumbai suburb.

Later, after the Harshad Mehta scam, when the then finance minister Manmohan Singh wanted to break the nexus of brokers running Bombay Stock Exchange (BSE), IDBI drafted D.H. Patil to set up NSE. Ramkrishna, Narain, and Ashish Chauhan, who currently heads BSE, were deputed to work under Patil. That was 1992.

In the months to follow, Dave started taking Ramkrishna with him across the country to talk at forums to push the idea of giving more powers to Sebi. He wanted search-and-seizure powers, and also powers to investigate, which were considered far reaching for a market watchdog back then. Ramkrishna would often speak on the intricacies of setting up a powerful regulator after Dave gave the opening address. “She was rock solid when you asked her to pitch in,” he recalls.

A CHARTERED ACCOUNTANT, RAMAKRISHNA started her career at the Industrial Development Bank of India (IDBI) as an assistant manager in charge of capital markets. In 1988, she was deputed along with colleague Narain and a few others to write the rule book for Sebi, under S.A. Dave, then executive director of IDBI. Dave, who became Sebi’s first chairman, remembers the day Ramkrishna submitted a paper on merchant banking. He was so impressed that he walked across to Narain’s office asking him to “draw her out”. He felt that unlike the two management graduates in his team, who were trained to communicate better, Ramkrishna tended to be quiet at meetings. Says Dave: “Her paper indicated that she was not just clear headed and a person of detail but also that she could think of the future.”

Clearly, how Ramkrishna resolves the conflict and what she does thereafter could determine her legacy. Those who know her well say she’s a straight talker. One of the investors who has been discussing the listing issue with her says that though the conversations sometimes get heated, “with her, you get what you see”. NSE board member and noted corporate governance expert Y.H. Malegam says: “Chitra was closely involved in the decision-making process of the exchange for several years with Ravi. She not only has the capacity but also the admiration of the board for being chosen to run the exchange.”

Be sure that the PE investors will not be cowed down easily and will clamour for an exit. Despite poor economic sentiment, the primary issue could be a runaway hit. Based on relative valuations of global exchanges, in March 2012, Nikhil Vora, managing director and co-head of research at IDFC Securities, valued NSE at $3.7 billion (Rs 22,640.3 crore). The world’s largest exchange, NYSE, is currently valued at $7.5 billion, while the most valuable is the Hong Kong Exchanges & Clearing exchange (HKEx) at $19 billion. With revenues of
Rs 1,680 crore, NSE may not qualify to be a Fortune India 500 company, but with Ebitda margins of over 70%, it will rank among the top 100 companies in terms of profitability. A PE fund manager who was a co-signatory to the letter to Ramkrishna says the valuation could even top $5 billion, if NSE can leverage the emerging market growth story. With those numbers, NSE will rank among Fortune India 500’s 50 most valuable companies, alongside a Tata Steel or Dabur India. “The sooner Ramkrishna does the inevitable [listing NSE], the higher will be the trust on her skills to take on global competition,” says the fund manager.

NSE’s investors are still awaiting a response from Ramkrishna. Some investors were privately told that the board considered their letter in its meeting on Aug. 14 but decided that it was not the appropriate time to discuss a primary issue. When Fortune India asked her about taking the exchange public, she said it was her board’s prerogative to bring up the matter first, before she could discuss it in public. But, even if she doesn’t want to talk about it, the prevailing conservative view at NSE is this: The exchange was started as a public utility with shareholding of public sector institutions such as Life Insurance Corporation of India and the State Bank of India, giving it a unique autonomy. That autonomy came along with several regulatory and supervisory powers to conduct surveillance of its members and investors who trade on the NSE. Recently, Sebi disconnected the trading terminals of Mehul Choksi, owner of Gitanjali Gems, India’s biggest diamond jewellery firm, after the NSE found some trading discrepancies in its shares. So, unless it can be ensured that shareholders won’t be able to influence the regulatory role of exchanges, how does one take something like the NSE public?

HIGH RISE: NSE tickers along side the lifts at the Exchange Plaza
HIGH RISE: NSE tickers along side the lifts at the Exchange Plaza

Back in 2007, when PE outfits bought into NSE, exchanges couldn’t be listed. Then, in 2010, the stock market regulator, the Securities and Exchange Board of India (Sebi), set up a committee for ‘Review of Ownership and Governance of Market Infrastructure Institutions’ under the former governor of the Reserve Bank of India, Bimal Jalan. The Jalan committee recommended that exchanges should not be listed as they were akin to public institutions and should not be driven by a profit motive. This was widely criticised, and ultimately ignored by Sebi last year, when it allowed exchanges to list. Eighteen months later, the country’s first listed commodities exchange, National Spot Exchange, promoted by Jignesh Shah, went bust after failing to settle trades worth Rs 5,600 crore. Ajay Shah, professor at the National Institute of Public Finance and Policy and one of Jignesh Shah’s vocal critics, says, “It is a good time to review the decision to list exchanges.”

Two months later, investors such as General Atlantic, SAIF Partners, and Temasek, who collectively own over a quarter of the exchange’s equity, followed their April meeting with a three-page letter to Ramkrishna. They wanted answers. What is the roadmap to list the exchange? Why does NSE pay them a meagre dividend (30% last year) while sitting on huge cash reserves (Rs 5,000 crore-plus)? Why does NSE have only three shareholder directors when regulations allow for six? The investors even marked a copy of the letter to NSE’s chairman S.B. Mathur. By August, the business media got wind of the goings-on and financial daily Mint reported that a spat was brewing between NSE and its PE investors.

ON APRIL 23, 2013, three weeks after Chitra Ramkrishna, 50, took over as managing director and CEO of National Stock Exchange (NSE), she faced baptism by fire. A bunch of private equity investors of the exchange met her and Ravi Narain, her predecessor (and now vice-chairman), to find out her plans to take the exchange public. At the meeting in her office on the seventh floor of Exchange Plaza in Mumbai’s Bandra Kurla Complex, Ramkrishna, who did most of the talking, did not give away much. In the six years since PE investors first bought their stake, Narain has rarely spoken publicly of listing NSE either.

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