Management Discussion and Analysis 1. Industry structure and developments. The industry we operate in, for the most part, is facilitation of trading in securities - from br-trade order management and risk management, through trading of various assets on its electronic trading platforms and post-trade clearing, settlement and record-keeping services. The Indian exchange space potentially spans many asset classes - equities, equity derivatives, ETFs, mutual funds, debt, interest rate derivatives, currency derivatives, power trading, and commodity derivatives. Designated regulators like SEBI, FMC, CERC etc. regulate all Exchanges and other intermediaries in India. However, in India, no authorized framework for non-exchange entities to compete with exchanges exists, as has been the case in the United States and in Europe. Stock Exchanges are primarily regulated by the Securities and Exchange Board of India (SEBI) and product classes - equity, equity derivatives, debt products, interest rate derivatives and currency derivatives -are traded on the recognized stock exchanges. Along with the stock exchanges, other Market Infrastructure Institutions (MII) comprise depositories and clearing corporations that conduct the function of holding the traded securities in dematerialized form and provide clearing & settlement services, respectively. Both the existing national exchanges have their own clearing corporations and hold equity stake in the two national depositories. In June 2012, SEBI came up with SECC Regulations to regulate recognition, ownership and governance in stock exchanges and clearing corporations and matters connected therewith or incidental thereto. With the notification of these Regulations, The Securities Contracts (Regulations) (Manner of Increasing and Maintaining Public shareholding in recognized Stock Exchanges) Regulations (MIMPS), 2006, which dealt only with the Stock Exchanges stand repealed. SEBI also had, earlier this year, released the exit process to be followed by defunct stock exchanges (yearly turnover less than Rs. 1,000 crores). It is in the process of setting up a committee to discuss interoperability of Clearing Corporations vis-a-vis establishing a single Clearing Corporation and to submit their recommendation on the functional details for the same. 2. Outlook Despite two years of declining equity volumes, in view of India emerging as a strongly resilient and growth economy and one of the most attractive emerging markets for investments, we believe that over the medium to long term, individual investors will eventually return to the market. In the long term, given the outlook for continued growth and wealth-creation in India, we believe corporate profits and equity market performance will warrant continued interest from Indian institutional investors and foreign investors also. The share of investment in securities as a percentage of gross financial assets of households has been quite small at 4.3% for the period from 2005-11. However, their share has picked up in the recent period. Increasing investor education and competition would lead to greater awareness and expansion of the securities market. We also believe that there is significant scope to increase ownership of ETFs and Mutual Funds in India. The securities market would continue to be driven by introduction of newer products and services for investment and risk mitigation through better technology. 3. Competitive Strengths & Opportunities BSE has significant room to improve its market share in equities and equity derivatives. As our technology and service levels improve, we believe we will have continued opportunities to improve our competitive position. We have a significant asset - the Sensex index - which is widely followed and can be leveraged further to create value in India and outside of India (through license arrangements). The Sensex has been licensed to other BRICS exchanges through our BRICS Exchange Alliance and it has been licensed to Eurex, part of Deutsche Boerse Group, which is a strategic partner and 5% shareholder in the BSE. As is true in any business, competitive dynamics will continue to influence the future in the exchange space as it has done so far. BSE expects that it will face competitive threats from new entrants into its core equity and equity derivatives businesses. Each player will act upon its strengths and try and leverage the same, to garner bigger share of the market volumes. We believe that our robust balance sheet, well established brand, large established member network and diversified business model will help us to survive even in a difficult business environment in the coming years. 4. Risks and concerns The Exchange's performance is dependent upon the volume and value of trades executed on its trading platform, the number of new/further listings and the amount of capital raised through such new/further issues, number of active traders in the market, etc. Adverse macro-economic climate and political uncertainty may dampen the sentiments of the capital markets. Post liberalization, Foreign Institutional Investors (FII) have played a dominant role in generating volumes in the Capital Markets. However, the downturn and related problems in many developed economies may have a negative influence on FII investments in the country which in turn would adversely affect the trading volumes of the Exchange. Furthermore, policy decisions by exchange industry's regulator could impact the attractiveness (to foreign and domestic market participants) of participating in our markets and thereupon influence our business. The Exchange generates substantial revenue from listing fees and Book Building Services provided to corporations during their new/further issues. Factors like the macro-economic environment, industry-specific conditions, overall capital market sentiments, political stability and regulatory requirements would influence corporate decision to tap the capital markets. The extent of such influences may impact the Exchange's revenues. Indian capital markets, post liberalization, are at par with most of the developed capital markets in risk management. However, continual adaptation on part of the Exchange to dynamic changes in business, regulatory and technological environment are imperative to maintain or grow its operations and financial results. The competitive landscape for the securities transactions business in India continues to be challenging. Our ability to compete in this environment and ensure that regulations continue to allow competition on a level playing field will be a major factor in ensuring sustained growth and profitability. Regulatory decisions relating to the exchanges ownership structure, the ownership structure of ICCL and CDSL, compensation policies, restrictions on how exchanges distribute their profit and public listing will continue to impact competitiveness. BSE and its competitors must spend significant management resources trying to anticipate and involve themselves in the evolution of regulations and rules that can significantly impact the success or profitability of our businesses. As the country's financial system is developing rapidly, we expect that there will be continued changes to the regulatory structure in the near and medium term. 5. Internal control systems and their adequacy BSE Limited identifies a risk based internal audit scope and assesses the inherent risk in the processes and activities of the department within the Company and ensures that appropriate risk management limits, control mechanisms and mitigation strategies are in place. The Internal Auditors, via, their internal audit reports, make observations relating to the deficiencies/non-compliance of various audit areas and give suggestions/recommendations and control directives like periodic reconciliation, proper authorizations/approvals, processing controls, segregations of duties, maker - checker approach etc., so as to mitigate the deficiencies and make the process, procedure, systems and functions more robust, accountable, reliable and compliant. The observations made by the internal auditors and the compliances thereof are placed before the Audit Committee. BSE Limited has further implemented br-audit of all the major payments made to vendors based on a set criteria. Thus it strives to put in checks and controls like, internal approvals, budgetary controls, documentary controls, compliance to statutory requirement etc. BSE Limited conducts in-house monitoring of the statutory and regulatory compliances that are important and applicable to the Exchange. The importance of the compliance was identified with the help of the outsourced agency. The compliances and the monitoring thereof are regularly placed before the Audit Committee. The processes and quality management systems of BSE Limited is ISO 9001:2008 accredited with JAS-ANZ. BSE Limited conducts the audits of the processes as required under ISO 9001:2008 and has successfully completed for the fiscal year 2011-12. The Company has an Audit Committee, the details of which have been provided in the corporate governance report. The Audit Committee reviews audit reports submitted by the internal auditors. Suggestions for improvement are considered and the audit committee follows up on the implementation of corrective actions. The Committee also meets the Company's statutory auditors to ascertain, inter alia, their views on the adequacy of internal control systems in the Company and keeps the board of directors informed of its major observations from time to time. 6. Financial Performance 6.1 Total Revenue The debrssed volumes in the overall market resulted in the Exchange's Average Daily Turnover (ADT) in cash segment to fall to Rs. 268,071 lakh in financial year 2011-12 as compared to Rs. 433,330 lakh the brvious financial year. This decrease in the average daily turnover resulted in lower earning from transaction charges to the Exchange. However, this shortfall in income was compensated largely by increase in income from depository services. The total income from Securities Services was Rs. 17,167 lakh as against Rs. 17,923 lakh in the brvious year. During the year, the Exchange invested a part of its funds in long dated and high rated bonds and debentures of the corporates, both taxable and non-taxable. These initiatives resulted in the Exchange earning an income of Rs. 26,827 lakh from investments and deposits during the financial year 2011-12 as against Rs. 22,742 lakh in the brvious year. The income from services to corporates for the financial year 2011-12 increased by 6% from Rs. 7,161 lakh to Rs. 7,6I8 lakh. This increase in the income from services to corporates reflects increase in listing and book building income. Other Income for the financial year 2011-12 was Rs. 4,084 lakh as against Rs. 4,038 lakh in brvious year. The total consolidated revenue rose by 7.50% from Rs. 53,806 lakh in financial year 2010-11 to Rs. 57,842 lakh in financial year 2011-12. 6.2 Total Expenses During the financial year, the Employee Related Costs grew by about 10% to Rs. 7,713 lakh primarily incurred by subsidiary companies to meet their growth requirements. The exchange continued to invest in technology and people to improve its competitiveness. The Computer Technology Related Expenses during the financial year 2011-12 were Rs. 5,317 lakh. This was mainly to continue the program of increasing order handling speed and capacity and to develop new monitoring and risk management tools. Other expenses (including debrciation) during the financial year 2011-12 was Rs. 11,802 lakh as against Rs. 10,038 lakh in the brvious year. This increase can be attributed to normal rise in costs alongwith one-time legal and professional expenses in relation to scheme of arrangement for transfer of division to ICCL. During the financial year, the Exchange has also incurred Rs. 6,049 lakh towards Liquidity Enhancement Incentive Programme (LEIP). The total consolidated expenses (without considering LEIP costs) rose by 8.60% to Rs. 24,832 lakh from Rs. 22,866 lakh in brvious financial year. 6.3 Taxes Provision for tax decreased from Rs. 7,766 lakh in the brvious year to Rs. 6,426 lakh in financial year 2011-12. The effective tax rate on profit before tax for the financial year 2011-12 was Rs. 23.83%. 7. Financial Position 7.2 Equity and Liabilities The paid up equity share capital of the Exchange rose from Rs. 1,034 lakh (rebrsenting 103,407,772 shares of face value Rs. 1/- each) as on March 31, 2011 to Rs. 1,035 lakh (rebrsenting 103,537,772 shares of face value Rs. 1/- each) as on March 31, 2012. The Consolidated Net-worth of the Exchange has increased to Rs. 223,022 lakh as on March 31, 2012 from Rs. 212,48I lakh as on March 31, 2011. The balance of Minority Interest as on March 31, 2012 amounted to Rs. I5,532 lakh compared to Rs. 12,494 lakh of brvious year. Current and Non Current Liabilities have increased from Rs. I35,656 lakh to Rs. I55,756 lakh in the financial year 2011-12. This was mainly due to short term borrowings to take advantage of high interest rates offered by banks on fixed deposit in the last quarter of financial year 2011-12 which was partly offset by reduction in deposits received from Companies at the time of listing their securities on the trading platform of the Exchange due to repayment thereof during the year and reduction in margins and other sums received from members. 7.3 ASSETS The Goodwill of Rs. 8,504 lakh has arisen out of acquisition of subsidiaries in an earlier year and the same continues to be shown as an asset. The Fixed Assets have increased from Rs. 11,559 lakh to Rs. 11,879 lakh mainly due to additions to assets of Rs. 1,864 lakh and increase in capital work in progress of Rs. 1,893 lakh towards setting up of the Disaster Recovery Site of the Exchange and after considering debrciation and retirement of assets. Remaining non-current assets and current assets rose from Rs. 340,569 lakh to Rs. 373,938 lakh mainly on account of amount placed as fixed deposit against short term borrowings. 8 Segment-wise reporting BSE's consolidated results are reportable under 2 business segments viz. Stock Exchange operations and Depository Services. The remaining operations do not meet the thresholds for reporting separate segment information under Accounting Standard-17 on Segment Reporting. 9 Material Developments after balance sheet date No material developments have taken place in the Company after the balance sheet date. |