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| May 15, 2000 | ||
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MARKET Taking Stock A host of imperfections continue to make the Indian bourses vulnerable to speculation and price-rigging By V.Shankar Aiyar
The committee also suggested that the existing circuit-breaker system be modified to provide for an exit route. Till now, if the price of a scrip moved up or down by 8 per cent, trading in it was stopped for the day. Now, for 200 scrips the circuit breaker will be applied in two phases: the first at 8 per cent, followed by a 30-minute cooling period, and the second at 12 per cent. The two measures, though significant, need to be followed by more reforms to bring Indian stock markets on a par with global bourses. Consider the manner in which settlements are done in India. The BSE, the NSE and the CSE -- the three major bourses in the country -- follow different trading cycles. A speculator can go short on a Wednesday on the NSE, shift to the CSE on Friday and move to the BSE on Monday. He can thus carry forward his position in an endless cycle of profit making without any hindrance and perhaps without paying any margin. The scope for manipulation is created not only because the exchanges follow different settlement cycles, but also because Indian exchanges follow a five-day trading cycle. On the New York Stock Exchange (NYSE), if an investor buys or sells shares on Monday, the payment and delivery of shares has to be made by Friday. In India, an investor can buy or sell on a Monday and discuss/exercise options till Friday. He can square up the deal on Friday or pay the margin and carry forward into the next payment cycle. Says Ravi Narain, deputy managing director, NSE: "There is no question of inter-exchange arbitrage abroad because all markets have rolling settlement (settling the transaction on the day the deal is done, though the payment can be made within four trading days). In India we are continuing with the weekly settlements. The minute the market moves to rolling settlement, arbitrage and attendant problems will disappear. SEBI has already made a strong beginning." True it has made a start. "But unfortunately," says an analyst, "it has been in the Dharavi counter where there is little trading. Real change will come when SEBI aggressively pushes high liquidity scrips into rolling settlement." Manipulation though is not restricted to settlement cycles. Take naked short selling by bears (selling shares without possessing or borrowing them). It needs to be banned since India has already introduced a stock-lending mechanism (institutions lending stocks at a payment). "Overseas a person going short either needs to own shares or borrow them," says a senior fund manager. "In India a person sells short without underlying securities with aplomb and profit." If a punter had gone short (1,000 shares each) on Zee, Infosys, Wipro and Satyam, which are the technology segment drivers, at their peak prices he would have, on an investment of Rs 64,94,600, reaped a profit of Rs 1.89 crore (see chart). In fact, on Wipro the punter would have recovered his entire margin in the first week itself. This, of course, doesn't include the badla (over Rs 5 lakh) that would have been paid. After May 31, this money would go to the investor protection fund. But naked short sales will continue for some time. In a sense, SEBI's move is but a halfway
house, though not everybody agrees. Mihir J. Doshi, CEO of JM Morgan
Stanley Securities avers, "SEBI's measures are important steps in the
right direction. Reforms like rolling settlement will come in once the
right infrastructure and depth of the market is in place." D.R. Mehta,
chairman, SEBI, agrees on the need for more reforms. "We are
committed to reforms. But we want to move at a pace the market can adjust
to," he says. "We need an electronic fund transfer system to
enable rolling settlement, we need derivatives like futures as an option
to the badla system. We could, and want to, go faster. Once the
infrastructure is there we will put other options in place and let the
investors and the market decide." But there are issues that cannot be left to the market. For instance, companies in India are required to give a seven-day notice to exchanges if the board is deciding on a matter that could influence its share price. Ostensibly, this is to avoid an information asymmetry. In practice, punters use rumours and innuendos to play the market, sending shivers down the investors' spine. Abroad there is no such restriction and companies simply come and announce to the market -- even during trading hours -- be it mergers, acquisitions or buybacks. Perhaps that may be too much, considering Indian standards of due diligence and transparency. A simpler solution would be to adopt the methodology followed for declaring results: announcement either before or after market hours. Then take the circuit-breaker system which till recently enabled punters to rig prices by up to 100 per cent in just nine trading days (up to 8 per cent each day for nine days). The new 8 plus 4 system is better, but not enough. Particularly in the Indian scenario, where nearly 60 per cent of most of the scrips listed are locked with promoters, institutions and mutual funds. The absurd rise and fall of technology shares is a clear result of illiquid scrips. Clearly, SEBI needs to step up surveillance and use its clout to push through reforms and bring the Indian stock markets in line with global standards. Stock exchanges too need to recognise that a better managed and systemised market place would only bring more investors (from the currently stagnant 70 million), volumes and business to their members. Globalisation obviously goes beyond aping the upward and downward spirals of the NASDAQ and the NYSE. |
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Small
dots often get missed in the big picture. But painters and graphic artists
appreciate that it is the small dots which make the big picture. On April
26, the Securities and Exchange Board of India (SEBI) put into place dots
that will alter the picture of Indian markets. In a historic decision,
nearly 31 years after the introduction of the badla system (which allows
carrying forward a position by paying interest costs) on the BSE, SEBI took
away the right of bears to earn money on their carry over positions and said
the monies would now go to the investor protection fund. Thus far, bears who
sold short (selling shares they didn't hold expecting a fall in prices) and
carried over their positions got paid badla. The SEBI-appointed risk
management group shot down this practice effective May 31.