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.