Change at NSE: What Ashish Chauhan Can Learn from Vikram Limaye’s Mistakes
Ashish Chauhan’s ghar wapasi (homecoming) to the National Stock Exchange (NSE) means coming back to an organisation that is vastly different from the one he had joined as the youngest member of its founding team of professionals who came over from the Industrial Development Bank of India (IDBI) in 1992. 
When he left NSE in 2000, the Exchange was considered the epitome of transparency, efficiency, values and ethics, along with the unthinkable achievement of market dominance. It was already a virtual monopoly and made extraordinary profits that would have been impossible under fair and open competition. At that time, it was facing its first brush with controversy over the Advance Lending and Borrowing Mechanism (ALBM), which was also called NSE’s badla financing, and was being grilled by the joint parliamentary committee (JPC) investigating the Ketan Parekh scam. Over the next two decades, NSE acquired Absolute Power, as we have documented in our book, zealously guarded its market share and became even more profitable; in the process, it also lost its moral compass.
Mr Chauhan’s predecessor, managing director (MD) and chief executive officer (CEO) Vikram Limaye, who demitted office on 16th July, had a golden opportunity to rebuild a morally broken institution. NSE’s co-location (Colo) was the centre of a scam which the previous management first denied and then tried to cover up. Subsequent revelations established how the Exchange was run like a private fief with almost no oversight by its glittering board of directors.
Typical of a monopoly, none of this affected its turnover and profits, which continued to grow in a ferocious bull market, especially after the COVID pandemic in March 2020. But, instead of a clean-up , the reputational damage worsened, with newer issues coming up. I flagged these issues in March 2022 (NSE Needs Complete Overhaul of Management Role and Responsibility before Appointing a New Chief ) just after Mr Limaye decided not to seek a second term in office. I wrote that the two key expectations from him were: “he would clean up the organisation left in disarray after the ignominious exit of two predecessors, Chitra Ramkrishna and Ravi Narain and would get NSE listed.” Neither happened.
Heading the largest derivatives exchange in the world (in terms of trading volumes) is a challenge and an opportunity. At the best of times, it requires a careful balancing act resisting pressure from powerful vested interests with diametrically opposite demands. Expectations from Mr Chauhan will be even higher, since he comes with domain knowledge of the capital market and its regulation, understands the technology and has a deep insight into NSE’s strengths and weaknesses. To my mind, here are the key challenges that the new MD would have to face and issues he would need to address.
1. Reduce Expectations: The biggest mistake would be to continue with the philosophy of the founding team—of retaining a monopoly and super-high profits at any cost. That is the road to ruin. Having seen the challenges and unfairness of being with a significantly smaller Bombay Stock Exchange (BSE), he must make it clear that there will be fair play and adequate room for multiple exchanges without the need to indulge in dirty tricks. As MD, he would certainly want to maintain market leadership, perhaps by a wide margin. But, if he makes the retention of market share a key result area (KRA), it would be disastrous.
2. Set Right Technology Issues: After the serious disruption in trading on 24 February 2021, the market regulator had accused NSE of having “faulty design in its critical trading infrastructure, lower than required capacity to handle the peak load, failure to test and supervise ‘failover logic’.” It accused top management, including Mr Limaye, of adopting a casual, lackadaisical and less-than-honest approach in allowing trading to continue without adequate risk management for well over an hour after problem was detected.
While the Securities and Exchange Board of India (SEBI) has tightened rules since then, the root cause analysis of the 2021 glitch and the mysterious decision not to switch to the back-up mirror site remains unknown. The Economic Times reported, in May 2022, that NSE has approached the regulator to settle the issue by making a payment. Since the settlement hasn’t happened as yet, this mess will need to be resolved by the incoming MD. More importantly, he will need to ensure that NSE has robust systems that can handle peak load trading volumes that are much bigger than those of the BSE. And that the technical outage will actually see a smooth switchover to the back-up systems without an embarrassing halt in trading.
3. Broker Defaults: Among of the big blots on Mr Limaye’s tenure were the astounding 32 broker defaults/expulsions since May 2019. Many of these brokers were luring investors with the offer of high trading returns on complex derivatives transactions. When the trading strategies failed, they inflicted cumulative losses running into thousands of crores of rupees on the hapless victims of broker failures. The biggest of these are: Modex International Securities, Anugrah Stock and Broking Pvt Ltd, Karvy Stock Broking, BMA Wealth Creators and Fairwealth Securities. Moneylife has been reporting the defaults regularly. Recently, I made a presentation to SEBI debunking the claim that defaults were part of a clean-up. At Moneylife Foundation, our view is that broker defaults are primarily due to poor oversight by the Exchange on brokers who whipped up higher  trading volumes, helping  NSE to remain the largest derivatives exchange in the world. You can read our presentation to SEBI here: Moneylife Foundation Submits Investor Perspective on 32 Broker Defaults at NSE before SEBI Committee.
4. Fair Deal for Investors: Mr Chauhan will do well by investors if he pushes for a substantial increase in NSE’s investor protection fund (IPF) and revamps the rules to give them fairer compensation. If 32 broker defaults/expulsions are to be treated as the side-effect of a ‘clean-up’, it is only fair that at least some categories need better  compensation, just like traders who lost heavily due to mandatory square-off of their open positions during the trading glitch of 2021.
5. Administrative Clean-up: After the Colo scam and the investigation that has followed, NSE has been recognised as a public authority and the Prevention of Corruption Act applies to it. The days of being able to hire consultants and issue contracts without following proper protocol are over. That this means more constraints on the new MD, instead of sweeping, untrammelled powers enjoyed by his predecessors, is a positive aspect of this change. Unfortunately, neither SEBI nor the exchanges want to take the next step towards transparency by submitting themselves to the Right to Information Act (RTI). NSE continued to fight the applicability of RTI during Mr Limaye’s tenure. Unfortunately,  is unlikely that Mr Chauhan will change this, unless directed by SEBI.
6. Work at Listing NSE: Mr Chauhan had a ring-side view to the 10-year long battle to list exchanges before the BSE, which he headed, was successfully listed in 2017. There are mixed views on whether first-line regulators, such as stock exchanges, ought to be listed at all; but that discussion is now dead. Despite the pressure to focus on profits, listing also brings transparency by training the spotlight of analysts on its actions. NSE has been obsessively focused on market share and profits anyway and, so, the challenge will be to list NSE with reduced profit expectations quarter-on-quarter. Hopefully, NSE’s board will be less decorative and  focus on setting and meeting  the right expectations. It is unclear if NSE can go for a listing in the immediate future, but investors will certainly expect Mr Chauhan to list the Exchange well before his term ends.
Listing will also depend what stand he adopts about the bourse’s decision to contest all SEBI orders pertaining to the Colo scam. Challenging  the Colo orders and refusing to pay up the paltry penalties imposed was, in hindsight, a spectacularly bad decision by Mr Limaye. It prevented him from executing a serious overhaul and making a new beginning. All eyes will be on how Mr Chauhan handles this difficult issue and whether he continue to fight the regualtor.
So, congratulations and best wishes to you Mr Chauhan for landing a  coveted job which also comes with  very hot seat at the moment.
3 weeks ago
Obviously, Ashish Chauhan has been brought in to help get NSE listed. Giving up market share or profit margins? You should know better! disclosure: don't hold either NSE (unlisted shares) or BSE. Wary about these two after your articles.
3 weeks ago
Well said. For all his name and reputation, Limaye will go down as a failed CEO who danced around the problems but did nothing to resolve them. Best wishes to Ashish Chauhan.
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