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'In India, IT was at the right place at the right time'

Nandan M Nilekani | January 30, 2009

The Bombay Stock Exchange buildingThe 1990s was a decade of enormous economic turbulence for India. Market forces struck hard in an economy whose support institutions had been frayed by years of socialism. This set off a series of scams, says Nandan M Nilekani in his book Imagining India.

In the third part of a series of extracts from his book, he looks at how IT initiatives targeted the economic disaster zones and transformed institutions like the National Stock Exchange into among the most efficient in the world.

They say that everything from love to war is a matter of timing, and for India, IT was at the right place at the right time. The shift from a socialist to a market economy is not a painless one, and the 1990s was a decade of enormous turbulence for India. Market forces struck hard in an economy whose support institutions had been frayed by years of socialism. This set off a series of scams, as people racked up huge profits from the chaos of our fledgling markets.

For the regulators in the trenches of the new economy, IT became a big part of the toolbox for fixing the glitches across our institutions. In 1992, less than a year after liberaliszation, India's stock exchange -- the Bombay Sensex (BSE) -- experienced a scam blow-out running into more than fifty billion rupees.

The scam was in some ways inevitable; the BSE was a tight, chummy network of brokers and investors, with highly suspect, weakly regulated trading and settlement processes. Ravi Narain, managing director of the National Stock Exchange (NSE) tells me, 'Customers who made trades in the exchange had to take their brokers at their word when it came to the buying and selling price of their shares. Brokers could make far more money lying about price points than on their commissions.' This skimming off had its own Indian term, the gala.

After the 1992 scam, the regulator, Securities and Exchange Board of India (SEBI), first tried to get the exchange to modernize its systems, but that did not work -- oversight was full of loopholes and there were too many entrenched interests opposing reform. SEBI's Plan B was a new, rival stock exchange, the NSE, electronified from the word go.

Narain is a soft-spoken bureaucrat, and gives the impression of a man with a quiet, geeky intelligence. I can see how the blustery traders of the BSE would have underestimated him when it came to the new exchange. 'They told us that we were bound to rail in our attempt to electronify it,' Narain says. 'The brokers and management alike told us that exchanges were "made of people, not technology".'

It was probably fortunate that no one expected them to succeed, since the brokers were a powerful group -- they had often forced the government to withdraw income tax raids by going on strike, and as Narain notes, 'During the nearly days, they could have got us to roll back the new systems if they'd wanted to. But by the time they realized what IT could do, it was too big an animal to kill.'

The new exchange allowed Internet trading and introduced an electronic order book system, eliminating the advantages Bombay's cosy broker networks had in terms of information on prices and trades. It also brought in massive new efficiencies. 'In the old paper-based systems, brokers would complete just 30 per cent of all orders and trade two hours a day,' Narain tells me. 'Then they'd spend six hours sifting through the paperwork. Now we can run the exchange for a full day.'

Most importantly, electronic orders dramatically flattened trading costs for investors across the country. C B Bhave, former chairman of the National Securities Depository Ltd (NSDL), India's first IT-enabled depository and now head of SEBI, tells me, 'Before the NSE came UP, 80 per cent of the people trading on the stock market lived in Bombay. Three years after NSE, the proportion fell to 40 per cent.' The efficiency of the NSE also forced the lumbering BSE to modernize, install IT systems and bring transparency across its processes.

To ensure the success of these IT initiatives, bureaucrats such as Narain and Bhave had to be IT evangelists as well, who could not be intimidated by either wide-eyed appeals from corporations or bureaucratic pressure. As Bhave says, 'You didn't have to be brilliant, but you had to be committed towards seeing the initiative through.'

But in choosing Bhave to build the NSDL, SEBI may have been fortunate in finding a combination of the two. Bhave calls himself a 'career chameleon' -- an engineer by education and with several years in the IAS, he came to the NSDL after a stint in finance, working with SEBI in secondary markets.

'My experience in the IAS did pay off,' he tells me, when we met in the NSDL office in downtown Bombay. With the NSE in place, everyone had already become a little wary of IT, and electronifying the NSDL required all of Bhave's consensus-building skills, which he had honed in the administrative services. 'Everyone -- the government, the corporations, the share registries and the investors -- had a "good" reason to not have IT systems,' Bhave says. 'There were the paper absolutists, for instance, who told me that we were "not an advanced country like the US" and that Indians wouldn't trust electronic documents -- we loved paper far too much.'

But the biggest hurdle was in persuading traders. 'The transparency IT systems would bring in was obviously a problem for traders,' Bhave notes. The big unsaid issue was the amount of black money in the market. No one wanted a trail of crumbs that would lead back to the candy store. 'We had to get the traders on our side, and to do that we couldn't think like bureaucrats, who want to know where the money is going, but like the investors, who would like to keep the loopholes. So we pointed out something to them that they had overlooked,' Bhave grins. 'If they decided the best way to keep their money under wraps was to opt out of our depository, then all the government would have to do to corner the black money was demand a list of those investors who had not joined our system. They would only make it easier for them to be rounded up!'

The NSDL was eventually the fastest in the world to implement paperless trading. It now has over 7.5 million investor accounts with an estimated $1 trillion worth of securities dematted. The information systems implemented at the NSE and NSDL have been especially good at picking up the trail of money across the economy, thanks to efficient real-time audit systems and the tracking of financial flows through banks and in and out of depositories and tax filings. This has made it remarkably effective in cleaning up and 'whitening' our markets.

IT initiatives during this time were certainly isolated, but they targeted what were the economic disaster zones of India's equity markets. By cleaning up these snarls, IT has transformed these institutions into ones that rank among the most efficient in the world -- NSE, for instance, rates in at 'T+2' settlements, a global benchmark which indicates that the final settlements of any transactions done on a certain day (T) get settled within the next two days.

Post these reforms, the number of transactions on India's stock exchanges has also exploded. Narain says, 'In 1992 India would do maybe three hundred crore rupees of business a day across all stock exchanges. In 2007 NSE alone did forty thousand to fifty thousand crore rupees a day.'

This automation of the stock exchange and securities market paralleled the automation in Indian banking that was taking place. When these two trends came together, the effect was remarkable. Bringing IT into these two sectors had effectively digitised the country's money flows. This would have a powerful domino effect in the following years as Indian businesses invested in IT to combine their own capital flows with India's banks and stock markets.

India's regulators were, however, still lone rangers in a governing environment that was if not hostile, at least indifferent to IT systems. Beyond our capital markets, the 1990s saw countless instances of failed IT initiatives. We have struggled here with what Keniston called India's 'Potemkin village' problem -- we have plenty of showcase 'pilot projects' which we have failed to expand beyond a state or city level.

Over 80 per cent of state-led electronification projects in the 1990s failed. Innumerable pilot e-governance projects were launched with great fanfare and then forgotten. Our government departments remained, stubbornly, environments of paper pushers, filing cabinets and typewriters.

Imagining India: Ideas for the New Century by Nandan M Nilekani, Penguin Book India. Price Rs 699 | Buy the book on Rediff Shopping

  • Nandan Nilekani introduces the series: Exclusive to
  • Part I: 'To get things done in government, you have to occasionally break all the rules'
  • Part II: 'India's software industry turned superstar after 1991'
  • Image: The Bombay Stock Exchange. Photograph: Sanjay Sawant

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