1. THE TUG OF WAR
NSE vs BSE

2. CONTENTS
 Introduction
 BSE
 BSE Restructuring
 NSE
 NSE Group Companies
 Competitive Landscape
 The Road Ahead

3. INTRODUCTION
 The Bombay Stock Exchange Ltd. (BSE) was
established in 1875 and is the oldest exchange
in
Asia and was the only exchange for investors in
India to trade in stocks (equity shares) till 1995.
 In 1995, National Stock Exchange Ltd. (NSE)
promoted by financial institutions was
established. Within a short span of time the NSE
with remarkable product innovations, use of
technology and professional management was
able to overtake BSE and emerge as a leading
stock exchange in India.

4.  In 2005, BSE had a market share of 31.11% in the
cash segment and 0.63% in the derivatives
segment, Corresponding to NSE’s 68.39% (cash)
and 99.37% (derivatives) respectively.
 In 2005, BSE converted into a corporate entity
(earlier an association of brokers) to compete
with NSE operations. The ownership and
management of the BSE were separated from the
trading rights.

5. BSE
 It was established in 1875 when 318 individuals
contributed Re.1 each and became members to form "The
Native Share & Stock Brokers Association". It was the
first stock exchange in India to obtain permanent
recognition in 1956 from the Government of India under
the Securities Contracts (Regulation) Act, 1956.
 BSE a voluntary non-profit association of broker
members emerged as a premier stock exchange after the
1960s.
The increased pace of industrialization caused by
the two world wars, protection to domestic industry
and government’s fiscal policies aided the growth of
new issues which in turn helped the BSE to prosper.

6.  BSE dominated the Indian capital market with over 60% of
the total turnover of shares traded.
 In 1986, the exchange came up with an index called
SENSEX, comprising of 30 representative stocks. The
stock were selected on the basis of their market
capitalization, number of trades, average value of shares
traded per day (as a percentage of total number of
outstanding shares), balanced representation of industry,
leadership position in the industry, continuous dividend
paying record and track record of promoters.
 This index subsequently proved to be the barometer of
the Indian stock market. Sensex emerged as a prominent
brand in the country. Sensex was scientifically designed
and based on globally accepted construction and review
methodology.
 The base value of Sensex was 100 taken as on 1978-79.

7.  The carry forward system or badla was a unique
selling proposition of the BSE.
 Badla provided the facility for carrying forward the
transaction from one settlement to another. It was
the postponement of delivery or payment for the
purchase of securities from one settlement period to
another.
 This facility of ‘carry forward’ provided liquidity and
breadth to the market.
 By bringing in outside money to fund the carry
forward of long positions, badla acted as a bridge
between the money market and the stock market.
 However, with the securities scam outburst in 1992
Securities Exchange Board of India (SEBI) took over
the control of the stock market and banned the badla
system in 1993.

8.  Until March 1995, BSE had an open outcry
system of trading. With the entrance of NSE - the
country’s first modern, computerized and
professionally managed stock exchange in 1994,
BSE had to change its system of trading and
operations.
 In 1995, BSE adapted itself to the BSE online
Trading System (BOLT), an electronic trading
system through which brokers traded using
computers.
 The surveillance, clearing and settlement
functions of the exchange were ISO 9001:2000
certified.

9.  Badla system was later revived and resumed in 1996.
 In 2001, due to the sharp fall in the prices of ICE
scrips across the globe and the recession in the
global economy resulted in a significant erosion of
market capitalization of stocks on the NASDAQ and
at other leading stock exchanges around the world ,
the value of the Sensex fell to 3788.
 The aftermath of this scam led to SEBI banning
badla once again and possibly for ever.
 In 1999, BSE set up the Central Depository Services
India Ltd. (CDSIL) co-sponsored by the State Bank of
India, Bank of India, Bank of Baroda and HDFC Bank.

10.  By 2005, the network of BSE spread across 417
cities, with over 800 members and 14,426 terminals. It
registered about 1.4 million transactions per day, and
an average daily turnover of about Rs.25 billion.
Restructuring
 In 2005, the BSE was de-mutualized and was
registered as a corporate entity under the provisions
of the Companies Act, 1956.
 In 2005, BSE along with Federation of Indian Stock
Exchanges launched a national trading platform
called BSE Indonext, for small and medium
enterprises. This platform helped SMEs to raise
capital and trade through BSE Online Trading and its
website trading system.

11. NSE
 Promoted by leading financial institutions was
incorporated in 1992 as a tax-paying company (unlike
other stock exchanges in the country).
 NSE was incorporated as a demutualized stock
exchange where the ownership and management
were deprived of the trading rights.
 It was set up as a public limited company and owned
by leading institutional investors in the country.
 The Board comprised of senior executives from
promoter institutions, eminent professionals in the
field of law, economics, accountancy, finance,
taxation, public representatives and nominees of the
SEBI.

12.  In 1993, NSE was recognized as a stock exchange
under the Securities Contracts (Regulation) Act,
1956. The exchange commenced operations in 1994
with the Wholesale Debt Market (WDM) and achieved
various milestones .
 NSE provided fair and transparent services in the
securities market to investors with the help of screen
based electronic trading systems.
 This technology-oriented mechanism ensured
transparency, shortened settlement cycles and book
entry settlement systems and thereby matched the
global standards of securities markets.

13.  In 1996, the exchange came up with an index called
NIFTY, comprising of 50 large, liquid and
representative stocks representing 24 sectors of the
economy and 77% of traded value of all stocks on the
NSE. The stocks were selected on the basis of low
impact cost, high liquidity and market capitalization.
 The base is defined as 1000 as of November 1995.
The index was professionally maintained and
reviewed every quarter.
 In 1998, NSE commenced Automated Lending and
Borrowing Mechanism for lending and borrowing of
securities (ALBM). ALBM was the answer to BSE’s
badla.

14.  NSE members were connected to the exchange from
their work stations to the central computer located at
the exchange through a satellite using VSATs (Very
Small Aperture Terminals). By 2005, NSE had
installed over 2,829 VSATs in over 345 cities across
the country.
 By 2004, NSE was known as the third best exchange
across the world.
 NSE won the Wharton-Infosys Business
Transformation Award in the Organization-wide
Transformation category for the Europe and Asia
Pacific region for harnessing technology to create a
world class exchange and bringing a revolution in
the industry as a whole.

15. Group Companies
 NSDL
 NSE along with the Industrial Development Bank of India
(IDBI) and the Unit Trust of India (UTI) promoted
dematerialisation of securities and set up National
Securities Depository Limited (NSDL) the first depository
of India in 1996. NSDL established a national
infrastructure of international standard to handle trading
and settlement in dematerialised form.
 NSCCL
 The National Securities Clearing Corporation Ltd.
(NSCCL), the first clearing corporation in India, was
incorporated in 1995

16.  . NSCCL sustained confidence in clearing
and settlement of securities (equity and
derivatives), promoted short and consistent
settlement cycles, provided counter party
risk guarantees and operated a tight risk
containment system. It also operated a
Subsidiary General Ledger (SGL) for settling
trades in government securities.

17.  NSE.IT Ltd.
 The 100% subsidiary, information technology arm of NSE.
NSE.IT provided products and services in areas of broker
front end and back-office, clearing and settlement, web
based training, risk management, treasury management,
asset liability management, banking etc.
 IISL
 In 1998, Indian Index Services and Products Limited (IISL)
was set up by the joint venture of NSE and CRISIL Ltd.
(Credit Rating Information Services of India Limited).IISL
provided variety of indices and index related services and
products for the Indian capital markets.
 DotEx International Limited
 DotEx provided world class Internet trading platforms to
members of NSE to further provide it to their customers.
DotEx provided products in two modules: Equity Trading
Module and F&O Trading Module.

18. COMPETITIVE LANDSCAPE
 NSE with approximately 860 stocks listed on its exchange
provided stiff competition to BSE which had around 8,500
stocks listed on its exchange.
 Around 50% of BSE's cash market turnover came from the
stocks other than those in the 'A' group. On the other
hand top 100 stocks on NSE contributed approximately
80% of its cash segment turnover.
 BSE Sensex suffered from hedging effectiveness, higher
impact cost and immense political hiccups. NSE within a
short period of time overtook BSE due to its
administrative improvements and less systemic costs
which attracted a lot of investors to NSE.

19.  Earlier the governing board of BSE was an elected body and therefore
its members were worried about broker sentiments; but with the
changes that took place and with competitive pressures from NSE.
broker members (who earlier were considered to be roadblocks) no
longer questioned the regulatory bodies.
Technically larger trading volumes and superior bid-ask spreads on
NSE attracted a large number of traders. More investors at NSE
opened different avenues of investment- for e.g. derivatives. Due to the
regulations at BSE, it merely concentrated in Mumbai, while the NSE
spread along the length and breadth of the country (8,000 terminals
across the country) and invited a large number of potential audiences
to the exchange.
 SEBI allowed exchanges to set up trading terminals abroad with the
help of Internet trading. Internet trading consisted of two types - order
driven trading system and quote driven trading system. BSE provided
both these systems while NSE provided only the order driven system.

20. The Road Ahead
 The restructuring at BSE required the member
brokers to offload their shareholding (i.e. 51%) by
2006. The various avenues considered were to offer
an IPO, or enter into strategic relationship or both
according to feasibility.
 Experts opined that if BSE entered into strategic
partnerships with large private sector banks it would
be exposed to a large distribution network and would
also be able to promote new products like derivatives
on a large scale.
 How and what strategy should BSE adopt to not only
preserve its historical image but also counter the stiff
competition from NSE needs to be seen in the future.