financials of clearing corporations of nse & bse

I share below a story on the financial health of the clearing corporations of National Stock Exchange of India and Bombay Stock Exchange which I wrote, recently, for the newspaper I work for.

NSE’s clearing subsidiary earned net profit of Rs 238 crore in FY11

Sebi’s new norms will require stock exchanges to divest at least 49 per cent in their 100 per cent subsidiaries

Like the stock exchange, National Stock Exchange of India (NSE), it does all risk management, clearing and settlement activities for, the National Securities Clearing Corporation (NSCCL) is the largest in the country not just in terms of scale of operations but also in its revenue-earning ability and profitability.

This is likely to fetch the clearing corporation a high valuation when the NSE, which owns 100 per cent equity capital of NSCCL, begins to comply with the new Securities and Exchange Board of India (Sebi) policy on market infrastructure institutions (MII) which prohibits a stock exchange from holding more than 51 per cent in a clearing corporation. As per the MII policy terms, NSCCL has three years to comply with the 51 per cent norm.

On the other hand, BSE’s 100 per cent subsidiary, Indian Clearing Corporation (ICCL), had not yet begun carrying out clearing corporation functions for BSE’s equity cash and equity derivatives segments, although the new Sebi policy for MIIs will make itcompulsory for BSE to get its trades in these two segments cleared and settled by an independent clearing corporation.

FC Research Bureau learns from NSCCL’s statutory filings it had a total income of Rs 377 crore in financial year 2010-11 (FY11), up from FY10’s total income of Rs 345 crore. Its net profit in FY11 was Rs 238 crore, more than Rs 226 crore in FY10. These represented decent financials given that they were not too far from its parent  NSE’s total income and net profit in FY11 of Rs 1,378 crore and Rs 637 crore respectively.

More signficant, however, was the accumulated un-appropriated profit figure of Rs 105 crore that NSCCL carried to its balance sheet, at the end of FY11, after appropriating Rs 130 crore towards general reserve, Rs 90 crore towards equity dividend and Rs 14 crore towards equity dividend distribution tax. The accumulated general reserve at the end of FY11 was Rs 891 crore while the paid-up equity capital was Rs 45 crore.

Starting with equity cash segment of NSE in April 1996, NSCCL current clears and settles trades NSE’s equity cash, equity derivatives, currency derivatives and retail debt segments. It also provides a legal guarantee of the settlements on these segments.

NSCCL receives clearing and settlement charges from NSE for all this. In FY11, of NSCCL’s gross revenue of Rs 377 crore, Rs 120 crore was by way of clearing and settlement charges paid by NSE, Rs 205 crore was in the form of income from investments and Rs 27 crore were other receipts which included Rs 20 crore worth of fines and penalities collected from NSE’s clearing members.

NSCCL’s income from investment included income it earned from investment of funds from accumulated cash reserves, accumulated un-appropriated cash profit and the cash component of settlement guarantee fund (SGF). NSCCL is empowered to collect cash and non-cash deposits from NSE’s clearing members to run the SGF. At the end of FY11, NSCCL had a total SGF of Rs 35,717 crore across its four segments of equity cash (Rs 5,100 crore), equity derivatives (Rs 29,760 crore), currency derivatives (Rs 853 crore) and retail debt (Rs 3 crore). Of this, the cash component was Rs 1,407 crore and non-cashcomponent was Rs 34,310 crore comprising of fixed deposit receipts, bank guarantees and securities.

Set up in April 2007, ICCL, BSE’s clearing corporation, had a gross revenue of Rs 4.9 crore and a net profit of Rs 2.3 core in FY11, as per its statutory filings gleaned by FCRB. These muted financials were on account of ICCL clearing and settling trades of only the corporate bond and mutual fund segments of BSE and also the currency derivativessegment of the United Stock Exchange of India in which BSE is a partner. At the end of FY11, ICCL had a paid-up equity capital of Rs 50 crore and reserves plus of just Rs 3.3 crore.