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 V Shankar Aiyar |
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AU CONTRAIYAR Rolling Racket It will be a happy Diwali on Dalal Street this year. Thanks to the munificence of the Securities and Exchange Board of India. By 'postponing' the institution of rolling settlement—fearing fall in turnover and liquidity—the capital market watchdog couldn't have chosen a better gift to brokers, speculators, punters and traders. To dub SEBI's decision capitulation would be an understatement. Effectively, SEBI has extended the right of punters to sit on the betting table and play without putting their money on the table week after week. Does that sound extreme? But that is exactly what rolling settlement is all about. Consider this. Last Friday, Nasdaq went up by about 200 points. Which meant that Indian tech shares would follow suit. So on Monday (when the market opens for the week on the Bombay Stock Exchange), you buy 1000 shares (@ Rs 1000) of say Optimism Ltd. You don't need to fork out any money. All you need have is a good arrangement with a broker. If you are the moderate kind of gambler, you simply stay with the scrip, watch it rise to say Rs 1,500 by Friday and sell it off to pocket Rs 5 lakh. If you are an inveterate gambler, you simply keep buying more to increase your profits. That is, if the market holds on. But suppose the market starts diving on Wednesday (which it just might), you simply correct your course, sell short just as easily and profit without putting any money on the table. You can walk home on Friday with the sum of your bets. How is this possible? The world over—particularly in the European and US markets—if you buy on Monday, the deal is recorded by the end of the day and payment is due by Thursday or latest by Friday. There is no room for discussion, debate and correction. Indian punters have it much easier because for some strange reason, India follows a five-day trading cycle. They can buy on Monday, keep correcting till Friday (if they are on BSE. On the National Stock Exchange you can do it Tuesday to Tuesday). Not just that, they don't have to make payments till the following Thursday. Again, that is if they want to carry forward the transaction. Or else simply round off or net your bets and get out on Friday. And start all over again on Monday. If you are a bit more adventurous, you do the following: ** Trade from Monday to Friday on BSE; ** Square off and move to NSE on Friday; ** Hold your position till Tuesday; ** Move back to BSE ... Theoretically you could—with a good web of broker arrangements—carry your position from exchange to exchange without ever having to record it. Which is what, rolling settlement would have prevented. None of this is unknown to SEBI or the Ministry of Finance. That is why SEBI instituted a risk-management group to suggest reforms—it took the historic decision of banning naked short sales. Indeed, when the decision was taken on May 31, it did seem that SEBI had managed to crack the whip and break the punter-North Block nexus. The web cast over so many years has simply repaired itself and blocked critical stock market reforms like introduction of derivatives which would have followed the institution of compulsory rolling settlement. What is tragic is that SEBI fell prey to dubious rationale while taking this decision. It has cited fears of falling turnover, liquidity and delivery of shares as the logic for putting off the decision. I am afraid the logic doesn't hold water. To start with, the logic is derived from a study of 163 B1 and B2 scrips which are on compulsory rolling settlement. To use the fall in turnover in these B-grade scrips to derive a decision on A group shares is to compare apples and oranges. Would the fall in volume in the Gas Authority of India be used to predict fall in volume of say, Infosys? Secondly, and more critically, what constitutes turnover? Can punters buying and selling positions through the week without hindrance be called real turnover? Surely, multiple corrections by punters—though they may take up the volume—cannot be mistaken for the real thing. Sure, the immediate result of bringing in rolling settlement would be a fall in volumes and perhaps raise the spectre of volatility. But critical reforms cannot hinge on perceptions of short-term impact damaging, as they might seem to the aura built around the efficacy of the current regime in the Finance Ministry. As for volatility, the jury is yet out on the co-relation and in any case, how much more volatile can the market get? While the stock exchanges may have used the rationale of volumes and volatility to twist SEBI's arm, these really are not the reason for their resistance to rolling settlement. The resistance to rolling settlement is the combination of institutional and individual interests of those operating on the bourses. If individual punters benefit via trading for five days, the institutions—stock exchanges—too stand to get a slice of the sinful returns. The truth is that Indian markets lack depth. But that cannot be created artificially by allowing punters to bet through the week to set up a facade of turnover. That would be like asking Sachin Tendulkar or the in-form Saurav Ganguly bat nine times. The route to improving depth in the Indian market is to promote institutional involvement in the capital market. The RBI has already expanded the scope of investment by banks in the stock market from 5 per cent of incremental deposits to 5 per cent of advances. Insurance companies the world over are major stake holders in the stock market. In India they are inhibited by fear and a 5 per cent limit. The Government could also look at expanding the role of pension funds and provident funds. If SEBI can allow monthly income mutual funds to invest 15 per cent of their collection in equity why can't the government do the same? If turnover and liquidity are such critical issues, why is the Finance Ministry blocking the entry of pension funds—Indian and foreign? SEBI's own survey (conducted by the National Council of Applied Economic Research) of popular participation in the capital market shows that barely 2 per cent of the population invests directly in the stock market. At least part of the reason would be that much of the population looks upon stock markets as a kind of casino. Therefore, the answer to a better market and investor confidence would be to usher in critical reforms—detrimental, as they seem to short-term interests. Be it that of market players, the Government or both. (V Shankar
Aiyar is Associate Editor, INDIA TODAY. He is based in Mumbai. |
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