BL 6/1/10

Points of contention

Gross profit margin equal to listed companies’ numbers.

Monopolistic environment.

Investors being charged for benefit of foreign stakeholders.

Just a fortnight after the SEBI board discussed the issue of conflict of interest in the working of stock exchanges, an organisation for investor protection empanelled with the regulator has highlighted what it calls the monopolistic tendencies of the largest stock exchange in the country and its impact on the retail investor interests.

The Society for Consumers’ and Investors’ Protection (SCIP), in its analysis of NSE based on secondary data sources, says that the NSE’s FY09 consolidated profit after tax of Rs 700 crore (on income of Rs 1,024 crore) makes for a gross profit margin of 67 per cent. Only 23 Indian listed companies have a gross profit margin of 67 per cent and above, it remarks.

Such “super-normal” profits leads one to conclude that it can occur only in a monopolistic environment of the kind in which NSE operates, the SCIP report says.

“There is immense scope for drastic reduction in the transaction charges levied on millions of investors, including common investors, as NSE’s revenue from transaction cost comprises 84.15 per cent of its total income.”

The NSE’s reserves of Rs 2,700 crore (excluding the deposits kept by members) further give it the strength required to consolidate its position to a near monopoly.

A part of the profits are paid out to the top brass of the exchange as part of their remuneration. The report also remarks that the Managing Director (Mr Ravi Narain) and the Deputy Managing Director (Ms Chitra Ramkrishna) earn gross salaries that are believed to be the highest in the industry and comparable to the salaries of top 10 CEOs among the listed companies.

How has NSE managed to remain a monopoly despite being a private sector company, asks SCIP.

The exchange has obtained a stay against the Central Information Commission at the Delhi High Court saying that it is not answerable under RTI as it is a non-government private sector company. This makes it under no obligation to file an annual report to Parliament, audit by Controller and Auditor-General of India and RTI compliance, notes SCIP.

NSE’s majority shareholding is by foreign and private investors, the report said. The super-normal profits arising out of the virtual monopolistic position of NSE is obviously benefiting such shareholders at the cost of millions of common investors, alleged SCIP.

NSE officials were not available for comment.

In December, SEBI had remarked in its board meeting that the quest for profits might dilute the unswerving commitment required from an exchange to uphold market integrity and the rules of the capital markets.

Exchanges have traditionally been the first line of regulation in the securities market. It merits careful consideration if there is conflict between the “profit maximisation goal” of an exchange vis-à-vis its regulatory role, SEBI had said.