Madhu Kannan leaves BSE in a more fragile state

After making the same mistakes as his predecessors, Madhu Kannan has quit BSE, saddling it with an expensive and inexperienced management team

On Tuesday, Madhu Kannan, Managing Director and CEO of the Bombay Stock Exchange (BSE) announced plans to quit and join the Tata Group. This was just a day after the Securities and Exchange Board of India (SEBI) announced the new policy framework for stock exchanges, depositories and clearing corporations. It may be a coincidence, but the timing of Kannan’s decision seems to suggest he is throwing in the towel when his attempt to shake the National Stock Exchange’s monopoly had clearly failed.

Mr Kannan, the hotshot imported from New York (he had worked at Merrill Lynch which imploded in 2008 and New York Stock Exchange before that) to turn around a sinking BSE has left it much weaker and more dangerously poised. BSE is saddled with a lop-sided pay structure and a deep divide between a tiny and extremely expensive top management team which has little expertise in running markets (far from turning around sinking bourses) and the rest of the staff. Mr Kannan has repeated the same mistakes of his predecessors, who quit under controversial circumstances and that too, by inflicting a much higher cost to the exchange.

BSE’s shareholders, who are mainly brokers, watched silently in the hope that he would manage to list the exchange at a good valuation and give them a good exit price. Mr Kannan’s expensive management team, comprising a number of US citizens (some of Indian origin), were expected to attract foreign institutional investors to invest. However, SEBI’s new rule of pre-empting 25% of the profit every year is a big damper and worried shareholders and staff are beginning to ask questions. Interestingly, the BSE’s average daily turnover was around Rs6,400 when Mr Kannan took over in 2009 and has shrunk to just Rs2,800 crore. Profits are also down, although the salaries of its top brass have sky-rocketed. This is probably something that Mr Kannan brought from the New York Stock Exchange (NYSE) and Merrill Lynch. Consider the messy trail Mr Kannan leaves behind:

  • Management Team & Leadership: In one of his first decisions, Mr Kannan had hired Galileo Global Advisors and its director Jim Shapiro (he was Kannan’s boss at the NYSE) to power BSE’s growth. Mr Shapiro’s expensive contract apparently ended in March 2011, after which he continued to be paid as a consultant under March 2012, but is no longer associated with the bourse anymore. Mr Sayee Srinivasan, once the India representative of Chicago Mercantile Exchange, also quit a couple of months ago to join the Commodity Futures Trading Commission as a financial economist. A few other senior executives such as Anjan Chaudhari and Sunil Vichare have also quit, while others who were seen as Kannan’s core team are looking for options outside. Only Ashish Chauhan remains, but it is not clear, whether the exorbitant price BSE paid to get him on board had any contractual strings attached. Another key executive is Mr Lakshman Gugulothu , who heads the BSE’s newly launched SME exchange. An IIM graduate and IPS officer of the Kerala cadre, Mr Gugulothu is seen as an independent minded person, rather than a Kannan groupie.
  •  The Questionable Marketplace Deal: In August 2009, Madhu Kannan inducted Ashish Chauhan, CEO of Reliance’s IPL team and once a part of NSE’s founding team. As a pre-condition to his joining, Chauhan has insisted that BSE acquire his company Marketplace Technologies Pvt Ltd (MT) for Rs43 crore. Mr Chauhan’s company, MT, had less than a dozen installations of broker front office software when acquired but Mr Kannan had argued that its acquisition would benefit the BSE. As suspected there is no perceptible benefit to the exchange through this acquisition. Instead, reliable sources say that top executives of MT are now hired by the BSE at salaries of over Rsone crore per annum. Some are now comparing the acquisition of MT to the scandal fof Rajnikant Patel’s $60 million technology deal with OMX (running exchanges in Nordic countries and now part of Nasdaq).
  • Board Resignation: The manner in which the dubious deal with MT was done led to the exit of Mr Vivek Kulkarni, former IT Secretary of Karnataka, who had objected to the ridiculously high valuation of the company. Mr Kulkarni subsequently quit the board in 2010 after objecting to the BSE’s plans to acquire Computer Age Management Services (CAMS) and because he was tired of the BSE top management cunning machinations in timing the board meetings exactly on the days when he was unable to attend. Kulkarni’s exit only benefited Mr Kannan and even the regulator doesn’t seem to have questioned what provoked the exit. He was possibly the only non-pliable director on BSE board, chaired by S Ramadorai, former Chief of TCS, which continues to provide information technology to the BSE.
  • Market making: Mr Kannan seems to have learnt no lessons from the spotty tenure of Rajnikant Patel, BSE’s former CEO, over a controversial decision to fork out Rs65 crore to two brokerage firms—Apollo Sindhoori and SAM Global—for market-making in the derivatives segment. Kannan too has been spending Rs50 lakhs to Rs one crore everyday on market making, without much effect or accountability on the part of the market-makers.
  •  United Stock Exchange Fiasco: If Rajnikant Patel has made a foolish decision to get the BSE to invest Rs100 crore for a 26% stake in the National Multi-Commodity Exchange (NMCE), Madhu Kannan did the same with the United Stock Exchange (USE), where he invested Rs 22.5 crore for a 15% stake in the United Stock Exchange of India Ltd (USE). He did this after the BSE’s own currency derivatives segment had died a quick death and despite objections from directors such as Mr Kulkarni. Kannan had ignored Moneylife’s queries about that investment in an exchange with no perceivable revenue model; the only public explanation was that the USE would use BSE’s trading infrastructure. The USE, which had no business model and had made a splash through frothy trading volumes, is now floundering. USE was recently raided by the Income Tax department and BSE’s Ashish Chauhan, who is now acts its CEO is struggling to answer the tax department’s queries. The investment and trading of Gaurav Arora, of Jaypee Capital, who is a large stakeholder in USE as well as NCDEX, is also under a cloud.
  •  Expensive executives: BSE’s former independent director, Mr Vivek Kulkarni had raised objections to its policy of splurging large sums of money on a top-heavy team which had caused personnel costs to soar. We learn that the BSE has nearly 10 or more top executives with pay packages of Rs1 crore per annum that are not connected with any performance benchmarks.

This is BSE’s third failed experiment with a SEBI-supervised / chosen professional management team. Strangely enough, this does not seem affect its “public interest directors” or its board. While there are many angry and unhappy shareholders and employees at the bourse, the exchange’s board of directors seems to be unconcerned. BSE is set to sink further unless its true owners – the stock brokers who hold most of the shares – wake up and act collectively.

K B Patil
1 decade ago
Well, it seems that only God can save BSE from its downward descent. I remember the days before the birth of NSE, investors had to bow before brokers for everything. You had to go by his word and receive sales proceeds as and when he felt like it. If the broker shareholders of BSE can see the incompetence of their current officials and yet keep quiet, they deserve the ride.
Debashis Basu
Replied to K B Patil comment 1 decade ago
They have all long ago become members of NSE. If MCS-SX comes, it may become the no.2 What BSE brokers get our of BSE as "absentee landlords" is a bonus. There is a vacuum and you wonder why the IAS officers who have run SEBI and the two ex-IAS officers (the IAS cadre has its fingers into everything whether they have any accountability and knowledge or not) who are now public reps, should not be blamed
mukesh kamble
1 decade ago
I am a trader and an ex employee of BSE when Rajnikanth Patel was the CEO. Everyone would agree that Exchange is mainly dependent only on its - technology and which every trader would agree is pathetic in BSE. The BOLT and Derivatives Trading terminals were developed on different platforms hence required different computers (additional cost to broker). I remember an incident when BSE received a BS certification in 2003/2004. It called SEBI chief M. Damadoran and felicitated itself from his hands. Instead of concentrating why volumes were dwindling, it concentrated on certifications. BSE has tried all stupid things like Weekly Expiry Options, cash based delivery, mid month expiry. They have forgotten that in any market there are 3 types of players - hedger, arbitrageur and Speculator and if u dont cater to all 3 then u are bound to perish!! Being a trader, we dont want to trade in only one exchange. This is driving the exchange market into a monopolistic situation where NSE would do what it feels like (we all knw abt the 55.5 Cr fine imposed on NSE by CCI). Even SEBI seems to be favouring NSE and has not allowed any other exchange to enter. The trader fraternity is eagerly waiting to trade in more than one exchange. I personally thought that BSE would improve once the new management took over but it too turned out to be a damp squib!! The wait continues....
georges ugeux
1 decade ago
I am appalled by the way Madhu Kannan's legacy is looked at. Knowing who has whispered in the journalist hear, I would suggest that those who were opposed to what the BSE CEO did have one thing in common: corruption. Mr. Kannan leaves a much cleaner and efficient BSE, competing with other Indian and world exchanges and got what the BSE had long fought for: respect. He will be missed for his integrity and leadership.
Suman Mukherjee
Replied to georges ugeux comment 1 decade ago
Mr.Georges Ugeux, with due respect, I would like to point to the fact that, the current functioning of the BSE does not in any way represent, what you say, "efficient BSE".

You have no answer to this part of the above write-up: "Interestingly, the BSE’s average daily turnover was around Rs6,400 when Mr Kannan took over in 2009 and has shrunk to just Rs2,800 crore".

It just goes to show, that even if a person has fancy degrees and scintillating past, there is no guarantee that he would succeed in all the assignments in future.
We should remember Mr. Steven Paul Jobs here of Apple Computers (Apple Inc)--a person who inspite of not having a fancy degree, reached the pinnacle of success. Shame upon this bunch, who poured water on all the aspirations of the BSE.
Replied to georges ugeux comment 1 decade ago
Mr Georges ugeux : Thanks for this email. But as one of the beneficiaries of Madhu Kannan's stint at the BSE, lets agree to take your comment with a pinch of salt? Also do check my other reports - we did expect a lot from Kannan and the fact that he had hired your consultancy company and Jim Shapiro. Didnt deliver, I am afraid! Here is the link to galelio.
Replied to georges ugeux comment 1 decade ago
You mean you know nothing about the kickbacks tor the MT deal, for thr scandalous market making support and all the IT contracts that went to TCS among many otters ?
sunil hemnani
Replied to georges ugeux comment 1 decade ago
Well it appears that another "con " was pulled on this country from a "hot shot" from New york .Paying big salaries to white skinned guys with fancy sounding degrees didnt help.The ground reality is he didnt come up with the goods and failed like his boss "Jim Thain".Who to was instrumental in making big salaries being handed out with no performance to show and was SACKED .Here the difference is just that he jumped the boat before the ship sank .The question is motives dont appear to have been noble and another con job was pulled out .The money spent by him in his personel capcity for possibly his own betterment leaves one astonished ,considering a Zero OUTCOME !! What explanation has been given for the multitude failure.
Replied to sunil hemnani comment 1 decade ago
When Indian folks have tried reviving the BSE for 100 years and failed, is it fair to point fingers at so called "White" folks? What about the rest of the Indian junta? Instead of having a blame game attitude, I wish the journalist would highlight the real issues for BSE. But wait, she won't do that because she falls under the NSE hood.

When the world has opened doors to Indians in every field, it is but a shame to downgrade "foreigners" and stick to my so called "frog in the pond" attitude.
sharad noname
Replied to sunil hemnani comment 1 decade ago
And there are still plenty of US citizens of Indian origin at the BSE drawing salaries of Rs 1 crore plus. The sad part is our broker community has been so quiet -- including our broker director (and the lady who claims she is so bold and outspoken) . They were all waiting for the US boys to rope in some phirang institutional investors and give them great valuation for their equity. NOW it seems like a pipe dream. The US boyz are running away at great speed!
Pardon me, but much as I would like to speak out - I too am hoping there will still be a listing opportunity - hence will remain anonymous :-)
sathya cumaran
1 decade ago
This much wanted decision as most the members of the stock exchanges are just puppets in the hands of stock broker they have no enough power to implement the rules framed by them because there is quiet a lot of red tapism and nepotism and rampant corruption that they are just being silent spectator without power
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