The post-scam agenda

Sebi must push through electronic funds transfer and margin trading

Sourav Majumdar

The scam of 2001 has had at least one positive fallout: it has stirred the powers-that-be out of their stupor and made them chalk out some sort of agenda for the future of the country’s stockmarkets. For instance, just after the Ketan Parekh-led scandal rocked the country’s capital market and banking system, and the crisis over the Bombay Stock Exchange (BSE) leadership broke, the finance ministry sat up, took quick note of the problems and announced a series of moves to push through further reforms of the stockmarkets. The irony was, however, that the stockmarket regulator, the Securities and Exchange Board of India (Sebi) earlier appeared reluctant to push through some of these measures, particularly the introduction of rolling settlement in the major stocks.

However, all that was then pushed through despite Sebi and, following July 2, the markets have ushered in rolling settlements in 414 major stocks. The other crucial and arguably bold step which has been taken as part of the clean up package has been the abolition of carryforward trading in all its various forms and its substitution with options on individual stocks. This one move, which Sebi finally took after some dithering, has gone a long way in restoring a semblance of credibility in an otherwise crumbling market environment.

I remember when I supported a ban on badla in these columns earlier, I was told by a television anchor on a show that I should take security cover before visiting the stockmarket area! However, badla has successfully been banned and I still continue moving about Mumbai’s office areas without any fear of being bashed up by irate brokers.

The fact of the matter is, having made some positive steps despite the dark shadows of the scam, the second generation market reforms are still showing signs of slowing down and even getting stuck in some cases. Take, for instance, the repeated rumours that have begun surfacing relating to the return of “some kind of hedging mechanism” all over again. This is clearly a function of what market players see as abysmally low volumes on the bourses, and is attributed to the fact that there is no depth and liquidity following the demise of badla and the introduction of rolling settlements.
Nothing can be further from the truth. The demise of badla is possibly the best thing to have happened to the markets in this country, misused and abused as it was by a certain section of players.

The introduction of rolling settlements has also robbed speculators, who were trying to gain a stranglehold on the markets, of an easy route to make money by punting throughout the weekly account-period settlements. However, it is true that turnovers on the bourses today are a fraction of what they used to be about six months ago. About Rs 10,000 crore of trading (combining both BSE and the National Stock Exchange) used to take place previously, which has now shrunk to around Rs 2,000 crore. But it is also true that an overwhelming part of those heady turnovers were on account of speculative activity, not resulting in delivery.

While it is true that the depth as seen in terms of turnovers has taken some hit after the introduction of rolling settlement, it is now imperative for the rulemakers in the market to ensure that the second generation reforms of the financial and corporate sector now take place quickly so that both depth and confidence are restored. One major issue which needs to be sorted out is that of an electronic funds transfer (EFT) mechanism in the banking sector which has a direct bearing on rolling settlements. If the market players do not get the facility of real-time funds transfers, the entire rolling settlement system is bound to be affected since funds take a long time even now to be cleared from one end of the transaction to the other. EFT has been discussed for quite some time now, but the introduction of rolling settlement has now necessitated that real-time funds transfer has to be pushed through at the earliest. As stockmarkets regulator, Sebi has a role to play in pushing this agenda through.

Yet another banking issue is that of margin trading, which could go a long way in imparting the necessary liquidity into the markets system. The first step in this direction has already been taken by Sebi which has suggested that banks should lend funds to the stockmarket system through the exchanges. This, most market players feel, may replace the perceived vacuum created by the abolition of badla. The bottomline in all this is that with the scam now behind us, it is imperative that the country’s stockmarket and banking regulators get together to chalk out a clear cut strategy to set up the infrastructure which would make transactions easy in the new environment and impart the necessary depth to the system. Only that can ensure that the gains which have been made in the past few months are not frittered away at the altar of inefficient follow up measures.