D-Street’s CAS turmoil clouds BSE’s growth outlook

A chaotic start to India’s bid to bring closing share-price discovery in line with global standards is hurting BSE Ltd., with some analysts questioning the growth outlook for Asia’s oldest exchange operator.

Shares of BSE have fallen more than 9% this month on concerns about the impact of the so-called Closing Auction Session on the exchange. Options turnover and volumes on the bourse have dropped after the new system was introduced on Aug. 3.

Jefferies Financial Group Inc. cut the stock to underperform this week, the first sell recommendation on the BSE since October, while Nuvama Wealth Management reduced the shares to hold while slashing its price target by 20%. The stock still has buy ratings from more than half of the 18 analysts tracking it, with the 12-month consensus price implying about 20% upside.

The auction, one of the most consequential stock market reforms in years, is modeled on frameworks used in developed markets and is meant to improve price discovery and prevent market manipulation. Despite mounting complaints, the Securities and Exchange Board of India has said the mechanism is here to stay.

BSE’s average daily premium turnover declined 18% for the Aug. 6 and Aug. 13 expiries compared with the average for weekly expiries in July, according to data compiled by Bloomberg. The number of contracts traded also fell by 20% during the period.

“With contract market share at ~50% and incremental levers exhausted, we see no near-term trigger,” Nuvama analyst Prithvish Uppal wrote in a note. The exchange also faces a fresh challenge from the Reserve Bank of India’s tightening of funding rules for proprietary trading, he said.

BSE can explore measures such as raising options fees and messaging fees for its co-location facility to boost profitability, but investors may be assigning a higher valuation to volume-led growth, according to Jefferies analyst Supratim Datta.

Datta expects BSE’s average daily turnover to recover from October once the auction issues are resolved. But he sees BSE’s market share remaining flat in fiscal years 2028 and 2029, potentially increasing downside risk to earnings.