The Cochin Stock Exchange (CSE) has become the first stock exchange to insist on demat delivery in 12 scrips shortlisted for mandatory demat by Sebi, despite it not having signed up yet with the depository.

The Sebi diktat was applicable only to those stock exchanges which have signed up with the depository. The problem for smaller exchanges including the Cochin bourse has been the failure to put in place a trade guarantee fund, a prerequisite for getting connected to the National Securities Depository Ltd (NSDL).

However, what has sent shivers down the spine of these bourses is the fact that they would become the dumping ground for bad paper since in other bourses these shares would not be able to be delivered.

This has led Cochin Stock Exchange to strike a dealwith the Stock Holding Corporation of India Ltd, a depository participant, through which it would be routing the depository settlement in these 12 scrips which would be shortlisted for mandatory demat trading from January 4 onwards.

Investors, however, would need to pay a transaction fee of 0.10 per cent against 0.05 per cent, since the settlement would be treated off-market which attracts a higher charge.

"We appreciate the fact that the transaction charges payable would be higher than that which our investors would have paid had CSE been connected to the NSDL through its clearing house. But the problem is that we fear a major inflow of bad paper into our system and cannot take a chance and hence are forced to go in for this system of offering demat facility till such time we get connected to NSDL", said a top CSE member.

With trading in demat mode sought to be made mandatory during the coming year, the smaller exchanges are being forced to gear up to the challenge of trading in a modernisedenvironment.

These exchanges might well perish as they in any case have very low volumes and if these too move away from their exchange, survival could be an uphill task.

Most of these exchanges also thrive on arbitrage opportunities with the larger exchanges. With the latter insisting on demat delivery the arbitrage volume at the smaller exchanges too would diminish.