After the storm

NSE's CEO-designate has to address crisis of confidence at the bourse

The chief executive officer-designate of the National Stock Exchange (NSE), Ashish Kumar Chauhan, takes over in challenging circumstances. The reputation of one of the world’s largest stock exchanges is under deep scrutiny. Former CEO Chitra Ramkrishna, another senior NSE officer Anand Subramanian, and even former Mumbai police commissioner Sanjay Pandey have been arrested in connection with two cases, one of which is the so-called “co-location”, or “NSE algo”, case. The Securities and Exchange Board of India (Sebi) has passed strictures and imposed fines on multiple NSE employees in that affair.

Another set of stunning revelations indicates corporate governance completely broke down during Ms Ramkrishna’s tenure. She bypassed the board to appoint Mr Subramanian group operating officer and adviser, offering unprecedentedly high compensation and assigning wide-ranging responsibilities without supervision. Ms Ramkrishna claimed she was taking orders from a mysterious guru, who is alleged to be the alter ego of Mr Subramanian himself after a forensic audit.

In principle, the NSE was supposed to go public years ago. But these controversies have held up the process. The crisis of confidence has led to investors such as Citigroup, Goldman Sachs, Norwest Venture Partners and Elevation Partners cutting exposure or exiting.

Mr Chauhan has the difficult task of retrieving the reputation of the NSE and rebuilding confidence. His predecessor, Vikram Limaye, struggled to manage the fallout of Ms Ramkrishna’s disastrous tenure, and also had to tackle an unpleasant situation where the NSE was embroiled in a legal battle with the Singapore Exchange (SGX), after the SGX attempted to launch overseas derivatives contracts based on the underlying Nifty. (The SGX and NSE have subsequently come to an understanding where these instruments are to be listed on Gujarat International Finance Tec-City.)

Despite these problems, trading volumes grew substantially during Mr Limaye’s five-year tenure, with the NSE’s revenues rising to Rs 9,499 crore in 2021-22 from Rs 2,681 crore in 2016-17. Net profits jumped to Rs 5,198 crore from Rs 1,220 crore in this period. The NSE retained its monopoly in the stock F&O (futures and options) segment with nearly a 100 per cent share, and grew its cash market share to over 90 per cent, along with holding a 70 per cent share in currency futures and 95 per cent in currency options. However, there were also glitches in the trading mechanism as well as 32 broker defaults. There were several halts in trading, including one in February 2021, which lasted several hours and resulted in a show cause notice from Sebi.

Mr Chauhan, who was part of the founding team at the NSE way back in 1994, before moving to the BSE, has decades of experience and domain knowledge in operations at stock exchanges. But he also has his task cut out for him.

The NSE’s monopoly market share makes it too big to fail since that would break the transmission mechanism for the flow of savings and overseas investments into financial markets. The new CEO must not only ensure that trading mechanisms and reconciliation systems can cope with the increased volumes. He must also ensure internal controls and oversight mechanisms are strengthened to prevent broker defaults, and to avoid more scandals like the co-location case.

Even more importantly, he has to rebuild investor confidence in the NSE, and, above all, he must reassure the regulator and other authorities that the NSE is capable of functioning as efficiently and transparently as befits India’s premier exchange. Moreover, he must do this with a team that is, in some senses, demoralised. Only then would the long-awaited IPO become a possibility.