A storm has started brewing in the National Stock Exchange over the proposal of the management to force all members to sign indemnity bonds as an additional safeguard against the introduction of fake, forged or stolen shares. There's nothing actually draconian about the measure. Any exchange should be guarding against the kind of delivery-related problems that keep recurring in our trading regime. The NSE has done the investing public a signal service by being tough on its own members first.

What is interesting about the NSE move though is not the rightness or wrongness of it, but the way it has chosen to go about imposing the new law on its members. The latter's views were given practically no place in the decision-making process till it was too late. The result: several hundred members are up in arms, some others are talking about going to court, and still others are talking of surrendering their memberships.

The management, which now quietly recognises that it misjudged the mood of its members, is planning to ease things somewhat. But on the core issue of obtaining personal bonds from the dominant shareholders of member-companies it will stay put. That's quite all right. What, however, is not so right is its fairly undemocratic approach to change--which could work against its ultimate success in the near future.

Now let's not get this wrong. The very reason for the NSE's tremendous success so far is the fact that it did not have to listen to its broker lobbies. The bane of the BSE has always been that the entrenched vested interests tended to thwart all moves for a change. Nowhere was this more apparent than in the way they, first, opposed all efforts of SEBI to regulate them in the early 1990s, and later, when they stonewalled all efforts to computerise trading and make their operations transparent. Since the governing board of the BSE is largely an elected body, its members had to worry about votebanks and broker sentiments. There was no way they could ignore their voters to ensure compliance with regulatory directives. The NSE, on the other hand, did not operate on the basis of a votebank. It could simply say: "These are my rules. Take it or leave it". Most members who wanted to join the country's most modern exchange decided that they would take it. And they have benefited enormously from that.

But things look set for another change. Unlike the past, the BSE today is a more united force that in once was. The same lobby of brokers that once served as a roadblock to change is now leading the change. The BSE no longer questions SEBI's regulatory authority. On the other hand, its top brass has worked hand in hand with the regulator to usher in reforms and greater transparency. Despite the fact that the regulator has taken tough measures against some brokers, the mood in the BSE is largely in favour of compliance—a sea change from what it once was.

The fact is, but for SEBI's funny conditions, the BSE could have gone national a long time ago. Among other things, SEBI's conditional go-ahead to the Bolt expansion plan said that the BSE must obtain the prior permission of the other stock exchanges to set up trading terminals in their areas.

There are, of course, small problems with the Department of Telecommunications, but these issues will be resolved in due course. Once the glitches are overcome, the BSE could start posing a national challenge to the NSE in terms of both turnover and volumes. The NSE's brokers will also have the option of playing one exchange against the other if life gets too tough at one exchange. The last thing the NSE can afford is to have is a sullen membership on its hands. The same decisiveness that allowed it to set up clean trading practices without consulting its constituents is now coming in the way of greater openness. If the NSE authorities had even consulted a few of their members before implementing the indemnity bond issue, they could have avoided a public spat over it. They are now belatedly trying to make amends for that miscalculation. The coming weeks will see the clash of two cultures--that of the NSE with its topdown style of functioning, and the BSE, which has seem reform being accepted as inevitable from the bottom upwards.

The truth is: both systems can work. What is not certain is which one will adapt faster to the changing times: a BSE board which takes note of its members' interests or an NSE board that occasionally listens to them but takes its own decisions. One analogy would be to compare the Chinese and Indian governments' approaches to reform. In China, the government decided where to take its economy, and all doubters were silenced. In India, it took a long while for the populace to accept that reforms were necessary. But when they did, there is now greater acceptance of reform and less chance of their being dumped by a new government.

It is obvious that the Chinese economy outperformed the Indian economy over the last decade or two. It also seems likely that in the foreseeable future, it will continue to do so. The moot point is: what happens if the political cauldron boils over, as it did at Tiananmen? That's the question that should be bothering the NSE as it enters the next phase of competition with the BSE.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.