Future Perfect

Updated: Nov 29 2002, 05:30am hrs
The finance ministry has approved Sebis decision to increase the number of stocks available for derivative trading from the present 33 to 100. Of course, one cannot expect Sebi to allow 67 additional shares for derivative trading in one shot. Yet, a modest beginning with around 20-25 shares should inject some vibrance into the market, besides providing opportunities to investors to hedge their risks.

The earlier form of futures trading viz., badla was available on all A group stocks. However, derivatives trading was approved in only 33 stocks. This curtailed volumes and dried up liquidity.

This time around Sebi will have to be careful while choosing the stocks for derivative trading. The erstwhile list included stocks such as Cipla, Hindalco, Grasim etc, that did not evoke much market interest. Hence, traded volumes in these stocks have been low. In contrast counters like Reliance Industries, Infosys Technologies, Satyam Computers etc have been quite active. The new list could include stocks such as Wipro, Zee Telefilms, HCL Technologies, Hughes Software etc as these are among the few scrips that have high level of trading interest.

At the same time, Sebi must change the method of settlement of derivative trades from cash to delivery. At present, trades are settled in cash. This gives a lot of leeway to manipulators to rig scrip prices to make profits.

For example, a high networth broker may sell Satyam futures without having a single share. He will not be required to purchase the shares back as the settlement will be in cash.

Hence, he may continuously keep on selling Satyam futures and keep the market price depressed. And at the end of the month when the contract expires the broker would rake in the moolah as the closing price would be lower than his selling price.

Had trades been settled by way of delivery, the broker would have been required to tender delivery of shares, he did not possess.

Or else, he would have to buy back shares, which would have raised the scrips price. Hence, chances of manipulation are far lower when derivative trades are settled by way of delivery.

Amendments to Sebi Act
Sebi is now a more powerful entity in regulating stock market with the Loksabha passing the Securities and Exchange Board of India (Amendment) Bill, 2002. Following the amendments, Sebi can now act tough against errant companies, traders and brokers. While this should help in restoring investors confidence, it will surely have a positive impact on market and would prop up sentiments.

The bill is primarily aimed at increasing the number of members on Sebi board from six to nine and confers powers upon Sebi to summon persons or institutions, suspend trading of any security at any exchange, prohibit insider trading and manipulative and deceptive devices through enhancing the penalties under the original act.

However, it remains to be seen how far Sebi will tretch itself in implementing them rigorously.

It is well known that in various instances relating to protecting investors interest, particularly that of small investors, Sebi was hamstrung between its own powers and other judicious authorities like Department of Company Affairs (DCA).

Sterlite Industries negative offer caught Sebi completely on the wrong foot as it fell beyond its jurisdiction while investors kept crying foul. Later, DCA disallowed various companies from opting the same route for buyback.

Sebis decision regarding calculation of price in case of open offers is also worth mentioning. It has often been noticed that just a few days before public announcement of buyback, the share price of the scrip rises sharply. As usual, the regulator fails to notice any case of insider trading here.

However, with the combination of higher penalties and the new rule for pricing of open offers the acquirer will be prevented from indulging in any malpractice. As per this rule the offer price will be the past 26-weeks average price or the past two weeks average price, whichever is higher.

The second announcement that may cheer small investors relates to the governments assurance on demutualisation of stock exchanges.

The move is a step further in preventing abuse of market by brokers and traders.

It has been often observed that stock exchange authorities and company officials form an unholy nexus at the cost of small investors. Demutualisation should weaken the nexus, hopefully.

Prashant Kothari & Laxmikant Khanvilkar