We Have To Discourage Derivatives Trading In The Markets: Ashish Kumar Chauhan

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Ashish Kumar Chauhan, Managing Director and CEO of the Bombay Stock Exchange is trying to build the 140-year old BSE into a global brand. However, recent routs on the market and non-performers have given the stock markets a bad name. In his conversation with Govindraj Ethiraj, Founder-Editor, BOOM he talks about strategising to rebuild customer trust as well as expand the customer base so that the stock exchange becomes a money-earner for the common man.

Chauhan says the good news is that the BSE has evolved to become an automated and a safe platform. But it has lost out on an important parameter – the trust of people. He says what concerns him most is that the number of people investing in markets has actually gone down. "The challenge is how to bring more people to invest in the markets rather than other asset classes," he says.

According to him, the problem is with financial markets as a whole. "Overall savings through financial instruments including banking, insurance and other assets is lower than other classes."

On the other hand, he points out how India, over last 20 years, got around $250 billion of foreign portfolio investment but have probably sent out $500 billion in importing gold."

That kind of money could have been used to create industrial growth, more jobs, the million jobs every month that we need for the next 20 years. India is a high savings country but is not a high investing country into productive capital. Low productive capital going into real estate or gold or silver is the problem, says Chauhan.

He says he has taken up the matter of improving awareness of stock markets several times with the Government. "The problem is you have have taken banking as a good boy and markets as the bad boy."

Interestingly, according to him, there is nothing wrong in promoting the banking system but responsibility and accountability got diluted there. Whilethe stock markets are under a microscope all the time unlike to some extent the banking system. "We have created a comparitive distrust in markets," he says.

Interestingly, the capital represented by stock markets is much larger than entire banking system which is also a surprise to him, says Chauhan. "Both need to grow compared to other assets, particularly idle assets," he says.

So how do you bring investors back ?

"Lets start auctioning Government bonds, lets make it easier for people like you and me to invest in Government bonds and they are the most risk-free assets in the world, particularly if you are trading in Indian rupees. The principal is not going to evaporate. And that can create trust in the markets process," he says.

One problem is on the flip side.

Chauhan says India is the second most speculative nation in the world after Korea. Korea's derivatives to equities ratio is 33 and we are at 15. And people who we learn from are 2:1 or 3:1.

Chauhan says India thus has a inverted pyramid structure where the riskiest instruments – derivatives – see the largest trading with bonds the least. The solution is to dis-incentivise derivatives trading, he argues.

One outcome of the current impasse is that the markets have almost forgotten their primary job of being a platform to raise capital. Wat makes matters somewhat more difficult is elements like the recently introduced capital gains tax that discourages investors further from entering the markets.

"Somewhere along the line you need a level playing field. If we are serious about investment and not speculation, than we have to incentivise. The way to do it is to reduce tax on equities, by putting 20 basis points on delivery is not helping. So bring down taxes on equities," says Chauhan.

The plans for BSE going ahead is to bring in commodities trading , promotion of IPOs, to upgrade bond platform, and a plan to set up a new stock exchange in GIFT city, Gujarat. Chauhan says that interest is quite high on a spot exchange for gold, and introduction of government bond trading.

“BSE aims to earn, but not at the cost of forgetting service to society”, Chauhan rounds off.

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