“BSE has never lagged behind in terms of market share when it comes to derivatives. Our thought process has always been that we need to deepen and strengthen the market, which means in terms of products, in terms of expiry dates, in terms of participants, FPIs, everyone. That is what we have been working on. So we will continue to work. That is why it is still a growth path for us,” said Ramamurthy.He noted that the exchange currently has about 470 foreign portfolio investors (FPIs) on its platform, indicating that there is significant scope for further participation.
“We have only 470 FPIs with us. Many more FPIs need to come in. We need to build more because there is a lot of demand. There is still a long way to go. Sustainability comes when you reach the top. I don’t think we have reached the top yet. We just started our journey over thirty months ago and we still have a long way ahead. Delhi bahut by hai,” he added.
On the impact of the recent Securities Transaction Tax (STT) hike, Ramamurthy said historical trends suggest limited impact on options trading volumes, although market structure could evolve as a result.
“On options, if you look at all the previous hikes, the previous hikes did not have any negative impact on volumes. So if we look at history, we have safe reasons to believe that the STT hike on options may not impact volumes. It may impact the microstructure of the market, that’s another issue,” Ramamurthy said. For futures, Ramamurthy says the government’s broader intention appears to favor longer-term investment behavior and greater market stability.
“The government’s thought process could probably have been to make the investors more long-term oriented in equity investments and, to the extent that mutual funds and others participating in the arbitrage futures market, slowly move them towards longer-term futures so that the impact of a higher GST is smaller on a longer-term contract compared to a shorter-term contract,” he explained.
He added that this shift could lead to arbitrage funds considering second- and third-month futures, which could help reduce the impact of transaction costs while increasing market stability.
“If an arbitrage fund were to think in terms of the second and third months, maybe it will reduce the impact and at the same time provide great stability and it will be more of a longer-term kind of product in the market. This is the thought process through which this change comes,” Ramamurthy said.
He also clarified that BSE’s exposure to futures is relatively limited compared to options, reducing the direct impact of higher taxes on the exchange’s overall volumes.
“Since BSE volumes are more in options, the impact of increased STT should be much less, if not nothing, nothing is needed for BSE,” he said.
Explaining how the microstructure of the market could change, Ramamurthy said higher trading costs could prompt retail investors to consider longer-term investment avenues.
“If a retail investor today is considering trading options or futures, it may be less costly for them to think in terms of a broad-based mutual fund or stock, take delivery of it and hold it for a longer period of time. So I think the idea is to get investors thinking in terms of longer-term stock investing,” he said.
He added that this is in line with the broader objective of capital formation for economic growth.
“The idea of a market is that it should support capital formation for the growth of the economy. Capital formation is supported from a retail perspective by contributing more to, for example, an investment fund or to shares,” he said.
On margins, Ramamurthy acknowledged a sequential decline, attributing it to BSE’s continued investment phase and one-off costs related to regulations.
“Neither revenues, margins nor expenses have fully crystallized for BSE at this point because BSE is in a growth phase. In the growth phase, we have invested significantly in technology over the last two years. Obviously, depreciation will start to come,” he said.
He also pointed to changes in labor law provisions, which had an impact on the quarter’s financial results.
“There has been a change in the government’s stand on this payment for gratuity and other labor laws, which has impacted BSE to the tune of about Rs 24 crore in this quarter. It is more of a current kind of adjustment and this will also be resolved,” he noted.
In addition, increasing volumes naturally increase operating costs, especially regulatory and clearing costs.
“If we start doing more volumes, our operating expenses will increase because a significant portion, around 50% of our operating expenses, will go towards SEBI turnover fee and clearing and settlement fee. That is inevitable,” Ramamurthy said.
He said the exchange is currently in a transition phase with both revenues and expenses growing, but expects margins to stabilize as growth matures.
“If sales grow very strongly, operating costs will grow to a certain level and then probably stand still. There will be some kind of equilibrium state when our growth stage reaches some kind of maturity level,” he said.
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