CALCUTTA, Feb 14: The Calcutta Stock Exchange authorities have set April 6 as the deadline for launching the trade guarantee fund (TGF) and dematerialised trading.At a board meeting today, it was also decided that support systems for online surveillance will be readied in the meantime so that they can be made effective from the first week of April, when the exchange completes one year of online trading.
CSE vice-president Mahesh Bajaj said CMC and Wipro have made proposals for the online surveillance software. Wipro has installed a similar software on the National Stock Exchange.
It was also decided to shift two scrips -- J K Synthetics and India Steamship -- from the specified to the non-specified group with effect from March 6, 1998.
Exchange sources said that the corpus of the TGF would be progressively raised from the intitial Rs 53 crore to Rs 100 crore as suggested by the Securities & Exchange Board of India.
The fund size has been worked out by taking into account the maximum settlementliability of the top 10 brokers of the exchange in their 'C' form statement (which depicts the difference amount of squared up trades) in the last 52 weeks. The interest earned on the TGF fund should be enough to meet 20 per cent of the liability amount multiplied three times over.
As decided earlier, the exchange will set up a trust to govern and administer the proposed TGF. The fund will have a non-cash element of Rs 40 crore made up of members' securities lying with the exchange as the base minimum capital.
The exchange has preferred the formation of a trust on expert advice. Since the purpose of the TGF is to safeguard the interest of the public at large including investors and exchange members, it would be regarded as an "object of public utility" and would qualify for registration under section 12A of the Income Tax Act, 1961.
As a consequence, all incomes of the trust would be exempt from income tax. In addition, any profit or surplus arising out of the income or assets of the trust would be usedexclusively for "guaranteeing the clearance and settlement" of all trades done through the C-STAR, the CSE's computerised trading system.
Exchange sources said that separate agreements would have to be worked out to facilitate and activate the guarantee mechanism. For example, the clearing corporation, the trust and the stock exchange would be parties to an agreement on the TGF.
The exchange now intends to incorporate a separate company called "CSE Clearing Corporation Limited". The new company will be managed by an independent board on which 60 per cent will be public directors and 40 per cent directors of the CSE.
The present clearing house operations (securities clearance and pay-in and pay-out of funds including margining system) would be transferred to the new corporation.
In addition, for the smooth administration of the TGF, the exchange will set up an independent trust. The composition of the board of trustees would be 60 per cent in favour of public representatives and 40 per cent from CSEmembers.
Under the proposed TGF mechanism, the entire settlement liability would be guaranteed by the trust administering the fund. All trades done through the C-STAR will be cleared by the CSE Clearing Corporation on the basis of "multilateral continuous net settlement".
The multilateral netting system takes into account the settlement obligations of members based on the clearing rate (on settlement date) for pricing delivery obligations and the difference between "actual" and "clearing" rates for squared up trades.
This system takes into account changes in counterparties to the trade at the delivery stage and ensures delivery versus payment to complete the settlement cycle. The CSE reckons the maximum settlement liability at any time will not exceed Rs 5-6 crore. This is based on the experience of the previous year when the maximum settlement liability (including difference payments) never exceeded Rs 6 crore.This will be more than covered by the annual income on the TGF corpus, estimated at Rs 8crore,including interest on the cash element of the fund and appropriation of the charge on members' turnover. The last 10-year history of the exchange shows that there were seven cases of default with the total exposure amounting to a little over Rs 16 crore.
The actual liability devolving on the exchange was about Rs 3 crore. Out of this, the exchange has about a dozen cards which if sold today would realise roughly Rs 1 crore on a conservative basis. Bajaj revealed that in the current year, the exchange proposes to transfer at least Rs 7 crore to the TGF in the form of income from transaction charges and interest income on the transactions charges collected during 1997-98.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
