BSE - The Revival of A Fallen Angel 😇

BSE, famously known as Asia’s oldest stock exchange, is an institution steeped in history. However, for a long time, the only iconic bit about it was its office building in South Mumbai, which was the face of the Indian markets.

In terms of business, it was losing out to NSE, thanks to NSE’s technological edge and quick adoption of derivatives. For decades, it lost out to NSE in terms of market share, ending up less at a fraction of its size.

However, out of a resilience to survive (and thrive) it has managed to set itself on a journey of transformation - growing its footprint across mutual funds, index derivatives, and innovative services.

Will it successfully transform itself, or just flicker away like most of the other stock exchanges in India did?

BSE - Not Just About Stocks

After years of losing out to NSE on stocks, BSE launched itself into several other areas of the ecosystem, and is today, a platform for trading equity, debt, currency, and derivatives, while also hosting the country’s largest SME exchange with over 480 listed companies.

Revenue Source	% of Revenue (FY24)
Transaction Charges	32%
Treasury Income	13%
Mutual Fund Revenue	9%
Clearing and Settlement Charges	9%
Listing Fees	20%
Others	16%

Beyond its traditional activities, BSE is making inroads into mutual funds, index derivatives, and colocation services, further solidifying its position as a diversified financial services provider.

Derivatives: The Rising STAR of BSE’s Revenue Mix

The derivatives segment, once almost non-existent in FY23, has become a crucial growth engine for BSE, contributing 16% of total revenue as of 2QFY25. Total Revenue of Equity Derivatives Segment

By FY27, this segment is expected to surpass 45% of total revenue, driven by:

Higher transaction charges: Increased from Rs. 500 to Rs. 3,250 per Rs. 1 crore, boosting revenue
Customer base expansion: With just 15–20 lakh monthly active derivatives customers, BSE has ample room to grow compared to NSE’s 42 lakh

BSE’s market share in equity index options ADPTV (Average Daily Premium Turnover Value) rose from 3.1% in FY24 to 11.9% by Nov-24. This is expected to further rise to 15% by FY27.

This robust growth has led to transaction revenue skyrocketing at a 70% CAGR, expected to hit Rs. 2,200 crore by FY27 (from Rs. 450 crore in FY24).

Regulatory Changes: A Blessing in Disguise?

In November 2024, SEBI introduced major reforms in index derivatives aimed at curbing speculative activity and protecting retail investors. These changes included:

Rationalisation of weekly expiries: Exchanges can now offer weekly expiries for only one benchmark index.
Increased lot sizes: Contract values were raised to Rs. 15–20 lakh from Rs. 5–10 lakh.
Stricter margin requirements: Calendar spread benefits were removed on expiry days.

💡 Note: A calendar spread refers to a strategy where an investor simultaneously buys and sells two different contracts with different expiration dates. The removal of benefits from such spreads is aimed at reducing excessive speculation.

While these measures could have disrupted trading volumes, BSE is relatively insulated:

Discontinued contracts formed just 21% of BSE’s index options premium turnover in FY24 compared to NSE’s 47%, indicating lesser impact.
By moving its expiry days to Tuesday, away from NSE’s Thursday, BSE has smartly avoided direct competition.
Larger contract sizes are reducing clearing charges, which are calculated per contract. This will lower costs from Rs. 2,013 per Rs. 1 crore premium turnover in FY24 to Rs. 734 by FY26, driving EBITDA margin expansion to 57% in FY26 from 29% in FY24.

These adaptations not only mitigate risks but also position BSE to capitalise on regulatory shifts as traders diversify their activity across exchanges.

Beyond Derivatives: A Diversified Revenue Play

While derivatives are grabbing headlines, BSE’s broader business lines are equally compelling:

1. STAR MF: The Crown Jewel

BSE’s mutual fund platform processed over 420 crore transactions in FY24, adding 2.7 crore new SIPs (up 116% YoY). Revenue from STAR MF is projected to grow at a 31% CAGR, reaching Rs. 287 crore by FY27 (from Rs. 128 crore in FY24). With increasing mutual fund penetration in India, STAR MF remains a long-term growth driver.

2. Asia Index Private Ltd. (AIPL)

AIPL, the custodian of the iconic Sensex, became a wholly-owned subsidiary in FY24. It has expanded its offerings with innovative indices like the BSE Internet Economy and BSE Power & Energy, catering to emerging investment themes. These indices are pivotal in attracting ETFs and index funds, further boosting revenue.

3. Colocation Services

BSE’s state-of-the-art colocation facility offers the fastest trading speeds in India. As volumes grow, the company plans to monetise this service further, charging for order throughput and market data feeds.

Conclusion - Long-Term Tailwinds Amid Challenges

BSE’s transformation from a traditional stock exchange to a diversified financial powerhouse is commendable. Its focus on high-growth areas like derivatives and mutual funds, coupled with efficient adaptation to regulatory changes, positions it well for the future.

However, the fact that it has successfully survived in the past, doesn’t waive it from potential regulatory changes, dependence on index options, and evolving cybersecurity threats.

While these hurdles exist, BSE’s strong execution and diversification strategies provide compelling long-term tailwinds, making it an organisation worth monitoring as it expands its role within India’s financial ecosystem.