Give the new system a chance

Sebi should ignore the protests made by brokers

Sucheta Dalal

Sucheta Dalal

It is a well known saying that the market is supreme. No one can control it or dictate to it because it has a mind of its own. Exactly a day after brokers across the country got together to protest against the Securities and Exchange Board of India’s (Sebi) turnover fees and the separate clearance for the derivatives segment, the turnover at India’s premier bourse — the National Stock Exchange (NSE) shot up to Rs 1900 crore. This is indeed much lower than the Rs 6000 crore plus per day, at the height of the speculative bubble of 1999-2000; but it is a truly healthy turnover for a market which has just moved over to rolling settlements, has scrapped badla trading and drastically reduced the transfer of speculative positions from one bourse to another through uniform settlements.

It is not just the regular turnover that is leaping ahead; the derivatives segment has also been forging ahead. From a little under Rs 50 crore a day last week, turnover at the NSE more than trebled to Rs 160 crore on Friday and continues to grow. That the turnover shot up from Rs 128 crore on July 12 to Rs 160 crore the next day is probably an indicator of the pace at which derivatives are gaining acceptance.

This only goes to show that the smaller investors and traders are getting over the effects of the scam of 2001 and showing signs of returning to the market. The switch to rolling settlements and derivatives is a paradigm shift. It involves a new and unfamiliar system of client level margins which requires familiarisation and adjustment by clients as well as brokers. Also, the initial panic caused by several punching errors (or attempts to sabotage the system) which sent the market into a tizzy is at an end after some quick disciplinary and corrective measures.

As for investors, the rapid increase in turnover only shows that when compelled to switch they are happily experimenting with options and futures trades and also getting the hang of it. Several investors and brokers are even writing in to the NSE to say that they prefer the new system and to urge it not to go back to badla or a badla look alike. The message for the regulator is simple: it is less than a fortnight since the switchover to a new system, and Sebi would do well to ignore brokers’ protests for the moment and force them to give the new system a fair chance. In fact, there are three elements to the brokers’ protests, which need be examined separately.

The Timing: The brokers’ protest was very well timed. It took advantage of the temporary slump caused by the introduction of a new trading system and coincided with the Joint Parliamentary Committee’s (JPC) visit to Mumbai. However, although the protest got them a fair amount of publicity, their morchas and dharnas attracted little public sympathy. Let us not forget that the brokers had preferred belligerence and litigation to negotiation in 1992; and took their fight all the way to the Supreme Court. Eight years later, when they have lost fair and square, they are taking to the streets once again, in order to pressure the regulator to accept their demands. It would be foolish for Sebi to succumb to such pressure without watching the situation for some more time.

Brokers losses: A feature of the stock scam of 2001 is that lakhs of investors have indeed suffered losses, but the losses of large brokers at all major stock exchanges are significantly higher and seriously more debilitating. These brokers are guilty of encouraging large clients to speculate recklessly, misappropriating vyaj badla funds and some have even committed fraud by issuing fake contract notes to clients. Many have still not paid back smaller clients who are in no position to protest; and some brokers themselves have been bullied and beaten up by their shady clients. A Calcutta Stock Exchange (CSE) president was roughed up, arrested, and forced to sign several IOUs by a large client. Even the biggest market operator has signed away his seaside bungalow and several of his expensive cars to the same investor. Others have entered into questionable deals with shady industrialists and find themselves stuck with duplicate shares. Yet another institutional broker has had to sell several of his newly acquired offices to settle debts. In addition, the losses at the unofficial market in Kolkata are estimated at anywhere over Rs 2000 crore and are largely irrecoverable. None of these are systemic issues, but they have all caused serious damage to brokers and investors and added to the sense of gloom and panic.

Bourse losses: Nearly 21 out of 23 stock exchanges are reportedly in the red and only the NSE and the Bombay Stock Exchange (BSE) are making money. This does not indicate a malaise but a paradigm shift which will end the life cycle of nearly 20 bourses. The statistics prove it all. The NSE has reported a healthier bottomline and paid a 30 per cent post tax dividend to its investors. It is the only bourse that does not enjoy lucrative tax exemptions. If the BSE has not done as well, it is only because of its investment in the Central Depository of Securities Ltd (CDSL). The BSE’s large investment in CDSL and its decision to transfer some of its money to a broker guarantee fund has eaten into its reserves. Moreover, infighting and rivalry among the broker directors of the BSE and CDSL prevented it selling its stake in the CDSL and recovering part of its investment.

Only the Delhi Stock Exchange has read the writing on the wall and offered to merge with the BSE. It is also seeking similar link ups in the derivatives segment. As for the CSE, the JPC itself ought to recommend its closure, given the revelations about its faulty computer systems, inability to collect margins and uncontrolled unofficial market which was patronised and nurtured by it members.
Sebi has to find a way to aid the closure of at least 16 other bourses, and help their members to merge with BSE and NSE brokers or allow them to switch their membership to the large bourses, by winding up their existing structures. The issue of turnover fees can only be decided in the context of the larger changes that are happening in the capital market.

Writer’s e-mail: suchetadalal@yahoo.com