The former SEBI senior executive director, in-charge of both the primary and secondary markets, feels that high levels of dematerialisation expected to be witnessed over the next six months will bring about higher settlement efficiency. This will lead to a greater preference among foreign institutional investors to trade in underlying shares rather than the GDRs, Bhave says.

"The settlement deficiencies in the system were the primary reason for the great rush for GDRs and the hefty premium that FIIs were willing to peg on them. But the fact remained that while GDRs could be traded only among FIIs, the underlying shares had a much wider investor participation, bringing us to the crucial liquidity factor. No investorwould like to trade in an illiquid security and let us face it, GDRs have been less liquid than the underlying shares in most cases," said Bhave.

"What did not enable FIIs to trade actively in underlying shares in the past were the risks associated with paper. We have been witnessing heavy amounts of dematerialisation in the past two years but the entire transition of the equity markets in India to a dematerialised environment would be complete in six months time by when the impact would also be visible on the GDR market," said Bhave.

After initial hiccups owing to lack of liquidity in the demat segment, FIIs have embraced the depository in a big way and most of them have already dematerialised their entire holdings.

All the FIIs registered in the country have opened accounts and it is learnt that several of them which were not trading earlier despite having registered themselves, owing to the risks of paper have started doing so in a small way.

The next six months are expected to see a radical growthin the levels of settlement through the depository. In January, Rs 3,000 crore worth of settlement went through the depository of the total Rs 8,000 crore worth of settlement that took place on the National Stock Exchange and the Bombay Stock Exchange.

"Not only will the Rs 8,000 crore figure go much higher, given the lowering of the settlement cost in a demat environment, the share of the dematerialised settlement component would also go up with more and more scrips being added to the compulsory demat trading list," said Bhave.

By April, about 64 top scrips in the market, including the entire Nifty and Sensex stocks, would have moved to the mandatory demat trading mode. This would imply that almost 90 per cent of the entire settlement in the markets would go through the demat mode, said Bhave.

Further, with the launch of the second depository, the concept of the depository is expected to spread further and the settlement costs expected to come down further.