Investec Bullish on BSE, Flags Regulatory Risks

Investec has issued a 'Buy' recommendation for BSE with a target price of ₹3,400 per share, although it has raised concerns about potential regulatory risks that could be more severe than anticipated, potentially overshadowing the benefits of increasing volumes.

At 11:36 am IST, BSE share price were trading 2% lower at ₹2,286.40 on the National Stock Exchange (NSE). The stock was adversely affected following a new SEBI circular on transaction charges, which stated that Market Infrastructure Institutions (MIIs) should not offer discounts based on turnovers. This directive also applies to stock exchanges and clearing corporations, which are part of MIIs.

BSE's stock has been under scrutiny recently after Moneycontrol reported that a SEBI-appointed working committee on F&O (Futures and Options) recommended increasing the minimum lot size of derivative contracts from ₹5 lakh to ₹20-30 lakh. Additionally, the committee proposed restricting weekly options to a single expiry per stock exchange per week and limiting the number of strike prices for options contracts as measures to control the rise in volumes.

Investec suggests that if these proposed regulatory changes are implemented, they could affect their forward estimates for BSE. The firm noted that BSE aims to protect its profitability through higher market share and reduced clearing charges despite these challenges.

Analysts believe that BSE might benefit unintentionally at the expense of the National Stock Exchange (NSE), the larger of India's two major trading platforms. According to Rajesh Baheti, Managing Director at Mumbai-based broking firm Crosseas Capital Services, asking NSE to choose between Nifty and Bank Nifty would be unfair. NSE currently dominates the market with an 80-90% share, while BSE holds about 20%. If regulations limit exchanges to one expiry per contract per week, it could give BSE an opportunity to capture up to 50% of the market, which Baheti argues would not be fair to NSE.

To conclude, while Investec maintains a positive outlook on BSE with a 'Buy' call, it acknowledges significant regulatory risks that could impact the exchange's future performance. The new SEBI regulations and proposed changes in derivative contract policies are key factors that could influence BSE's market dynamics and profitability.