A milestone is crossed

Notwithstanding motivated broker protests

It was not only long overdue, but to borrow Mamatadi’s campaign slogan, it was now or never. The Securities and Exchange Board of India (Sebi) has decided to phase out all deferral products and to shift over 80 per cent of stock trading into rolling settlement mode from July 2. It has also permitted the introduction of options on individual stocks and other derivatives, while prudently postponing individual stock futures until the market adjusts to Monday’s dramatic changes. Other decisions of great significance were the introduction of uniform settlements, which has been pending since 1992 and will eliminate the dangerous inter-exchange arbitrage market, and scrapping of the 8 per cent circuit filters — grossly misused by traders to distort the price discovery process. In the short term, Sebi’s decision could negatively affect trading sentiment; but trading volumes as well as investor sentiment are already at rock bottom, so this is the best time to push through dramatic change. The capital market has now crossed yet another milestone in its march toward globalisation and the adoption of international systems and best practices. The Sebi decision was accompanied by hysteria and doomsday prediction by market pundits but every significant attempt at market regulation and modernisation has been similarly greeted — and brokers have always been proved wrong. The reactions to Sebi’s many regulatory actions, supervision of brokers and stock exchanges, automated trading and to dematerialisation have all been similar.

Stock prices and trading volumes may continue to drop in the next few weeks, as broker lobbyists offer numerous academic arguments to pressure Sebi to reverse its decisions. But a lot of the capital market debate is rooted in more mundane realities such as the brokers’ payment problems. Brokers and financiers at Mumbai and Calcutta have lost over Rs 1,000 crore in the present crisis; a lot of the money is owed to clients whose vyaj badla funds or pool account shares have been misappropriated by brokers, among the most reputed in the market. If the problem has remained largely under wraps, it is because brokers have said complaints by them would only end any chance of their recovering any money. Sebi’s decision will definitely hurt these brokers, because lower volumes in the short term would affect their earning capacity. It is important to recognise these brokers’ motivations and not allow their problems to hold back the capital market from important systemic changes.