On Monday, shares of Bombay Stock Exchange (BSE) Ltd plummeted by 19 per cent amidst significant trading activity. This decline followed a directive from the market regulator on Friday, instructing the exchange to remit a regulatory fee based on the ‘notional value’ of its annual turnover. Notably, the stock had reached an all-time high of Rs 3,264.70 on April 24, 2024.
In accordance with the directive, BSE is obligated to pay the total regulatory fees, alongside 15 per cent interest, to the Securities and Exchange Board of India (SEBI). This payment is calculated based on the annual turnover, with particular consideration given to the “Notional Value” in cases involving Option Contracts.
SEBI’s directive brings to light a shift in the regulatory fee structure, particularly concerning the computation of fees based on ‘notional value’ rather than the previous method of using ‘premium value’. Notional turnover encompasses the total strike price of each contract traded in derivatives, invariably resulting in a higher fee outlay compared to the premium turnover. The directive, issued on Friday, mandated the exchange to pay a regulatory fee based on the ‘notional value’ of annual turnover. This significant development swiftly erased gains from the stock’s recent record high of Rs 3,264.70 on April 24, 2024.
While NSE settles charges based on notional value, BSE has traditionally paid fees based on turnover value. Meanwhile, BSE stated that it is assessing the validity of Sebi’s directive.
BSE’s Evaluation and Potential Liabilities
In response to SEBI’s directive, BSE conveyed that it is evaluating the validity of the claim. However, if the obligation is confirmed, BSE faces a considerable liability. The exchange would be liable to pay total regulatory fees along with 15 per cent interest for past periods, amounting to approximately Rs 68.64 crore plus GST, inclusive of accrued interest.
Analyst Perspectives and Market Reaction
The regulatory shift prompted brokerage firm Jefferies to downgrade BSE to ‘Hold’ from ‘Buy’ and revised its target price downwards to Rs 2,900 from Rs 3,000. The firm cited the imposition of higher regulatory fees as a factor limiting near-term upside potential.
HDFC Securities analysts provided further insight, indicating that the transition from premium to notional turnover represents a regulatory setback for BSE. They estimate BSE’s potential liability for regulatory fees to be around Rs 1/2.5/3.1 billion, constituting approximately 13/21/22 per cent of FY24/25/26E adjusted profit after tax (APAT). To mitigate the impact, one suggested approach involves increasing transaction charges by approximately 25 per cent while simultaneously reducing clearing charges by around 10 per cent. This strategic adjustment would help mitigate the impact on earnings projections.
Current Market Performance Dynamics and Future Outlook
At 09:44 am, BSE’s stock was trading notably lower, down by 17 per cent at Rs 2,677.95, in contrast to the 0.27 per cent rise observed in the Nifty 50. The trading volume on the NSE recorded a substantial turnover of 3.09 million equity shares.
Despite today’s sharp decline, BSE has witnessed a remarkable 415 per cent surge in its stock price over the past year, outperforming the benchmark index’s 23.74 per cent rally. Looking ahead, HDFC Securities maintains an optimistic outlook, anticipating a revenue/EPS CAGR of approximately 34/42 per cent over FY24-26E, primarily driven by a resurgence in transaction revenue.
The regulatory fee dispute between BSE and SEBI has triggered a significant downturn in BSE’s stock price, prompting market analysts to reassess their valuation and outlook. As the exchange navigates through this regulatory challenge, investors keenly await further developments and clarity regarding the potential impact on BSE’s financial performance and market positioning.
Also Read: RBI Asks Kotak Mahindra Bank To Stop Issuing New Credit Cards
