`Competition is needed everywhere' -- Dr R. H. Patil, MD, NSE

Deeptha Rajkumar

The National Stock Exchange (NSE) has perhaps been the foremost agent of change in the Indian capital market in the 1990s.

It has driven change and embraced technology without any hesitation. In an interview to Business Line, the NSE Managing Director, Dr R. H. Patil, outlines his views on the NSE's role and what the future holds.

Excerpts from the interview:

Looking ahead, what do you think are the major challenges facing NSE and what would be its growth opportunities?

The major challenge is what the NSE started out with -- the `department store' concept whereby all financial products will be available under one roof. We broadbased the equity market with the introduction of on-line trading, and so on. And derivatives were introduced.

There is a debt market, but it is neither very active nor nationwide. Then there is the fact that only one element of derivatives was brought in. Stock and index options are yet to come and the country is yet to see real securitised paper. It is still virgin territory with so many unchartered areas.

How do you view NSE the from a broader perspective as you prepare to step aside?

The traditional concept of a stock exchange was a historical evolution. However, only one section of the market place, that is, the intermediaries, came together to set up an exchange. Other financial intermediaries were kept out. The exchange become identified with a particular place and people trading for that place. Hence, the stock exchange, as an entity, had really not developed as a market place.

The market place does not belong to private entities nor should it be identified with a particular place. A stock exchange should, in fact, be viewed as a telephone exchange or a power utility or any other social utility. It should be a faceless entity with players from all over.

The NSE has destroyed the age-old image of an exchange. We brought in nation-wide trading. That is one reason why we chose the word `national'. Earlier, the regional bourse was the only point of contact with the capital market for the local investor. Today, because of the NSE, the regional stock exchanges (RSEs) are more centralised in terms of connectivity with the central market and more cost-effective.

Has the NSE done whatever you would have liked in the time you were at the helm?

It is a process which has begun. The NSE is now almost six years old and in an institution's life, that is a very small period. But the comforting thought is that in six years, we have achieved so much. Much more than what some exchanges have been able to in a century.

What do you think are some of the missing elements if any, and, retrospectively, would you have done anything different?

Missing elements are all the financial products enumerated which an exchange should be able to provide. However, it is not always possible to bring it all within one period of time. What is important is that the vision should be kept alive and continued by the successor. Luckily at the NSE, my successor has been involved with the establishment from Day One. So we share the same vision.

Are there any lessons to be learnt form the way the NSE and the capital market have developed, and what do you think are the most important ones?

There is one important lesson that we as a country need to learn. The entire planning process which was evolved in 1950 destroyed one very essential element responsible for the growth of any country -- competition. The planning process has, so far, been the very antithesis of competition. And it is my personal view that if the country has lost in growth, it is due to the lack of competition.

I would be very happy if at least in the stock exchanges, we continue with the concept of competition. It is a strange feeling when people talk about merger of exchanges. It is antithetical to competition. Mergers happen to destroy competition. If it happens because of some strategic technological inputs, then there is some relationship that can be developed.

Take a look at one of the best examples of a competitive economy -- the US. It does not discourage M&As. But the concept of anti-trust is very strong. Anything that leads to the destruction of competition is opposed immediately. Take for example the case of Microsoft. It was not doing anything anti-competitive. But the view was that the growth of one single entity would destroy competition. Why is the US economy so productive? Because there they believe in competition.

Without competition the system stagnates; one would lose sight of customer service, labour becomes lethargic. People talk about mergers for survival. So, allow mergers but ensure that the element of competition is kept alive at any cost.

Merger of stock exchanges is bad -- for the investor, for the country. In the absence of competition every entity -- public or private -- gets demotivated. There is no incentive to improve or grow. For instance, when there was no NSE, how the BSE functioned.

Do you think the NSE and its associates, such as NSCCL and NSDL, are in good hands and have developed adequately as institutions to survive and grow, even if some of the current senior managements leave in the next few years?

It is very important that institutions are system-driven. When I use the word `system', I am not referring to software. There are certain standard systems. For example, the delegation of duty. Everybody should be given clear-cut responsibilities. If a decision is wrong, one can go for dispute resolution, but the decision is taken at that level.

I would say a successful organisation is one that runs smoothly even in the absence of the top officials. In an efficient organisation, nobody is indispensable. That is what we have tried to do at NSE.

For instance, many of our trading members are multiple exchange brokers. The questions -- who to meet, what are his personal predilections, how should he be approached -- are concerns that a member need not have when they come to the NSE. That is because our system is clearly defined and our rules and regulations are made known to everyone.

Is there a place for both the NSE and the BSE, looking at the issue from a long-term perspective and in the context of global-level consolidation (by way of takeovers and acquisitions)?

Competition is always good for the investor. Look at all the experiments in global consolidation. There has been so much of kiteflying. Take the case of the LSE. I think such mergers are meaningless. It comes more out of a sense of insecurity. An entity should survive on its own strength. Mergers are fine when it involves, say, a manufacturing entity, for it would mean vertical integration. It is a product-driven system.

However, in the case of exchanges, this would be meaningless unless all members, investors and customers come to a single screen. But such a merger is not required. And it is not the answer; they should work hard in a competitive atmosphere.

Is the NSE planning to be part of any global alliance such as the GEM, proposed by the NYSE or the grouping led by Nasdaq?

In the end they will all be friendship clubs and nothing beyond that. Any measure that limits or hurts competition is bad for the community and the market place as a whole.

How well is the NSE placed to cope with the technological challenges that lie ahead, especially in web trading?

Very well. In fact, the bedrock of this institution is technology. Screen-based trading is driven purely by technology. Very soon, it will be difficult to distinguish between a stock exchange and an IT company. We are not only an IT-user company. Since we are using a particular technology that others were not interested in developing, we had to develop it on our own. We had to develop technology for the market place too, so that it could grow along with us. Thus was born NSE.IT. Increasingly more systems will be technology-driven. Everything will become electronic.

Do you think the NSE and the BSE could have done much better by having more tangible forms of cooperation at least in some areas such as information collection from companies, its dissemination, surveillance and tackling the menace of price manipulation?

Collation of company information is a specialised area and exchanges should be kept out of it. I personally believe that a specialised centralised agency towards this purpose should be created. There are information vendors with the capability to do this and should be encouraged. It should be a common pool from which all stock exchanges can access.

It could be modelled on the lines of the US-based SEC's Edgar with whom all companies are required to file information.

One of our weak areas is company disclosure. The legal framework on this is not defined clearly. Companies are not obliged to share information. I personally believe the entire shareholding data should be made public. Anybody who acquires one per cent or more of a company's holding should make the information public. Today, regulatory requirements stipulate five per cent, but the market should know that something is happening there. Whether or not it is mandatory, it should be disclosed. It is in the interest of the promoter and the investor. To enforce this, we need to have a legal system in place.

How do you view the regulatory framework with regard to today's capital market compared to the time the NSE was started? What would be the role of the NSE in this process?

There has been a seachange. However, many issues still need to be resolved with, say, the Department of Company Affairs or SEBI. In India there are several regulatory agencies -- DCA, SEBI, the I-T Department. However, we have to look at how we can minimise the overlap and prevent a company from escaping a particular regulation because it is subjected to various rules.

As regards regulation, an exchange can only implant it, not frame a legislation. It cannot regulate. Exchanges are more of a business entity. The moment we start thinking of an exchange as a demutualised entity, we are going a step further in getting listed for trading. In such a situation, we cannot have powers over another listed company.

There is a conflict of interest. And as exchanges become more business-oriented, all regulatory powers should be taken away from them.

The NSE has played an important role in bringing transparency to the market, with the introduction of screen-based trading. Real-time trading helps in providing an audit trail thereby helping to detect and control price manipulation.

The Indian market seems to be narrowing by the day, with highly concentrated trading in a few scrips. Is this a cause for concern? How would you try and address the issue?

There is no denying that the volume of trading has gone up tremendously. But trading can increase only in large stocks. Volumes cannot go up in narrow-cap stocks.

However, large companies are few in number. So, trading gets concentrated in a few scrips. If we are to get over this syndrome, the economy should be able to encourage growth of large companies. There are many large companies which have not come to the market due to various reasons.

For instance, VSNL is a bright candidate. The railway system is another such huge entity. Property companies are also viable candidates. We can also look at the power sector. Why not privatise them and bring them to the market?

Privatisation is the key. In fact, it would bring richness to the market. The concept of subsidies should go, as it hampers growth. Nothing should be free. We have deprived the market of a variety of companies. In fact, today if were to privatise many of the PSUs, our total market cap -- currently $150 billion - could grow to be one trillion. Then, there will be no concentration in few stocks.

From an organisation standpoint and from the market's point of view, what has been the single most important development since the NSE kicked off operations and why?

Total transparency and investor-friendly exchange.

How do you see the Indian market in the context of systems in mature markets after six years of the NSE?

Much ahead in terms of technology, transparency. For instance, the NYSE is now looking at implementing transparency with regards to pricing on a real-time basis, order book, etc.

The NSE has set up various subsidiaries -- NSCCL, NSE.IT, DotEx, etc. Are you laying the foundation for going public one day?

It is a business entity and one day should become a listed entity. But for that to happen, listing should be taken away from the exchange. Anything else would be a conflict of interest. To this extent, the regulator should consider setting up a central listing corporation of India.

Pic.: Dr R. H. Patil, MD, NSE.