Ashish Chauhan tackles NSE’s biggest challenge – trust

The former CEO of the Bombay Stock Exchange (BSE) probably also had a keen eye on the devastation caused by the collapse of the world’s second largest crypto exchange, FTX. An $8 billion hole in its books has seen investors flock to other exchanges scrambling to get their investments out and a sharp decline in the prices of major digital currencies such as bitcoin.

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The spectacular bankruptcy of FTX is an indicator of what happens when an exchange falls under suspicion. Like the run on a bank, investors rush to liquidate their holdings, causing the market to decline. Crypto markets have been hit by disasters in the past but mostly these were in the form of token price drops. In May of this year, the digital currency Luna suffered a near-fatal meltdown and lost almost all of its value. Despite the biggest crypto crash up to that time – the ensuing wipeout was placed at around $60 billion – the market for digital currencies recovered.

The current bloodbath turned systemic when FTX, the exchange, became embroiled in the shenanigans surrounding FTT, tokens that were issued simultaneously by its founder, Sam Bankman-Fried. Its explosion has had a ripple effect. A week later, another exchange, the Hong Kong-based AX, suspended withdrawals. In a sign of the deepening crisis, crypto brokerage Genesis also announced that it was experiencing unusual withdrawal requests, forcing it to suspend redemptions in its lending business.

Given the position of NSE as the primary platform for Indian equities, it cannot afford any such setbacks. Like Caesar’s wife, it needs to be immaculate.

In fact, for any stock exchange, trust is a far more important issue than profit or any other number. The NSE itself came into existence in the early 1990s as an alternative to the century-old BSE, which was then controlled by a coterie of traders and was notoriously opaque in its operations. Not surprisingly, it was highly distrusted by retail investors, which affected their participation in the equity markets.

While BSE eventually got together, other regional exchanges did not. A payments crisis triggered by the activities of a circular-trade syndicate comprising prime brokers as well as executives led to the collapse of the Calcutta Stock Exchange in 2001. Similarly, in 2017, capital markets regulator SEBI found the Delhi Stock Exchange “serious” irregularities in its functioning.

Despite being marred by controversies, the NSE remains India’s largest exchange in terms of total and average daily turnover for equity shares. This trend started in 1995 and has continued since then. But its past problems, particularly the co-location issue that is in the courts, make it vulnerable to further erosion of trust.

History has shown that a stock exchange that fails to arrest its decline is doomed to die. In the US, the American Stock Exchange, which began life in 1842, followed that path. As an alternative to the larger and more demanding New York Stock Exchange, it was an excellent platform for smaller companies. But the advent of the Nasdaq sapped that advantage, and eventually the third largest exchange in the US had to put itself on the block.

While no such threat exists for NSE, Chouhan has an unfinished agenda. A listing of the exchange has been pending for years, with SEBI stalling earlier attempts in light of the controversies surrounding it. NSE’s influential institutional and individual investors, many of whom have been waiting to cash out for decades, will be keenly watching how Chouhan takes the IPO plan forward.

The new CEO, under whose watch the BSE went public in 2017, has decided to address the major hurdle with candor. In his conversation, Chouhan acknowledged the need to win back the trust but also acknowledged that court cases related to the events that took place before 2017 were out of his hands. He may have spoken directly to only a few of its influential investors, but his voice will reach millions of others invested in companies listed on the exchange, who value its integrity and stability.

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