BSE-IndoNext - Proposal by BSE to deal with Illiquid Stocks

A comprehensive approach to solve the problem of liquidity is taken by the Federation of Stock exchanges of India along with BSE and the RSEs. A proposal to provide a platform for trading and settlement of shares of small- and medium-cap companies listed both in the BSE and various small regional exchanges has been jointly made by the BSE and the Federation of Indian Stock Exchanges (FISE) to the Securities and Exchange Board of India (SEBI). The trading platform christened as `BSE-IndoNext' would enable shares of companies with a paid-up capital up to Rs 20 crore listed and traded on the BSE and the participating regional stock exchanges (RSEs) to be traded in a national market through a single order book on the BOLT system of BSE. It is said that out of the 20 RSEs in the country, so far 14 exchanges have expressed their willingness to participate in the new venture.

Trading on the new platform will be through the online trading system, or BOLT system, of the BSE. Currently, all the regional stock exchanges put together have a network of about 7000 small and medium-sized member brokers. BSE has a presence in over 400 cities, with its 1500 V-SATs and over 8000 trading terminals.

The participating RSEs, may, however, decide to add securities of a company not listed with BSE with paid-up capital above Rs 20 crore. The BSE and RSE members would be able to participate in trading in BSE IndoNext and the trading, settlement and risk management functions of this segment would be managed by BSE. However, since the `Z' group in the BSE comprises securities of non-compliant companies, these would not be listed under the new segment.

The proponents of this proposal considered it as a major initiative since this would generate liquidity in the targeted companies and offer an exit route to the investors and would benefit the companies, investors and nearly 7,000 members of the RSEs spread across the country. They also argued that the provision of a single order book at the national level for generating liquidity and utilisation of the infrastructure of the RSEs otherwise remaining idle by creating a model on the lines of Euronext (formed by the merger of the Paris, Brussels and Amsterdam stock exchanges in 2000) had also been endorsed by the Kania Committee on Demutualisation.

They also drew attention to the view of the Committee that the two premier bourses in the country — BSE and NSE — may raise the minimum capital requirements for listing of the shares which would leave no option for small and mid cap companies to raise capital from the markets. The proposed BSE IndoNext could fill this vacuum. Apart from providing the much-needed liquidity in such counters, the proposal would also lead to a balanced regional development and enhance the width and depth in the capital markets.

The members of BSE and participating RSEs would be able to participate in trading in the scrips included in the BSE IndoNext. The operations of this segment would be managed by BSE. The BSE IndoNext council comprising of representatives of BSE and Participating RSEs would oversee the affairs of the BSE IndoNext subject to overall supervision and control of BSE Governing Board.

Alternatively, they can settle trades through their Clearing Houses, after entering into a suitable agreement with the BSE Clearing House. In this case, the Clearing Houses of RSEs would have to maintain a minimum capital of Rs 10 lakh with the BSE. By this, they would be permitted to trade only in this special segment with exposure limit of five times of the capital deposited with the BSE.

While BSE would manage the clearing, settlement, surveillance and risk management functions, compliance of listing agreement would be the responsibility of respective RSEs for the scrips listed on them. The RSE members would also be allowed to do market making in scrips listed on their respective bourses.

With trading largely taking place on the BSE and NSE, the RSEs are recording very small, and in some cases no, trading volumes. BSE-Indonext is aimed at creating a national market for small- and medium-cap companies as well as increasing liquidity in them. It will allow companies listed only with RSEs to raise fresh resources from capital markets as well as provide unlisted SMEs to tap the capital markets. BSE-Indonext will also harness the infrastructure of RSEs, which is currently largely under-utilised. Apart from the several thousand companies listed on the RSEs, over 2000 listed on the BSE would be shifted to the new platform. Companies in 'B1' and 'B2' group of BSE having a paid-up capital of Rs 20 crore would be transferred to the BSE-Indonext, but the 'Z' group scrips of BSE will not be included in this segment.

BSE has devised a concrete scheme based on above considerations and published in its website for creating liquidity initially in select 100 scrips in B2 group. The Quote system would be re-introduced on the BOLT system only for these scrips. The scheme would be implemented w.e.f. April 19, 2004 on the BOLT system and would be operational for an initial period of three months.

Under the Quote system, two-way Quotes are present where, both the buy price and the sell price is indicated. Members can enter both Quotes and Orders at the same time, which will be present simultaneously in the system. Quote can be entered only of the scrips that are selected for the Quote system. The traders can enter Quote for all the client ID's. However, a trader can place only one Quote per scrip and the next Quote can be only entered after the execution or deletion of the previous Quote.

All Quotes has a Buy side and a Sell side. When one side of a Quote gets exhausted the other side gets automatically killed. Traders can Enter, Modify and Delete Quotes during the continuous session. Quotes cannot be entered in the post closing session. The pending Quotes are returned in the end of the trading session.

The salient features of the scheme are specified by BSE as under

• Eligible Scrip: The scheme would be initially available in 100 scrips identified in B2 group.

• Matching: The Orders and Quotes would get matched first on the price and then on time priority, as per the existing Order-to-Order matching system. However, the Quote would have priority in execution only if an Order and the relevant side of the Quote are at the same time.

• Exclusivity: Both Orders and Quotes would co-exist. Order-to-Order matching would be possible and Quote would be matched with only Orders.

• Quote Spread Size between Bid/Offer Price: The spread of the Quotes i.e. the difference between the sell / offer and the buy / bid Quote would be maximum 10 times of the tick size applicable for the scrip. The Total Buy Quantity and the revealed Buy Quantity as well as the Total Sell Quantity and the Revealed Sell Quantity have to be in multiple of market lot. The revealed quantity has to be at least 10% of the total quantity.

For example, if tick size of a scrip is 1 paise then the maximum spread size would be 10 paise. If tick size of a scrip is 5 paise then the maximum spread size would be 50 paise.

The scrips selected under this scheme will have suffix 'Q' to the existing scrip Ids of the scrip.