Cheques amp; Balances

The NSE's badla and other related issuesWhen the National Stock Exchange NSE announced a second settlement this time of three days - i...

The NSE8217;s badla and other related issues

When the National Stock Exchange NSE announced a second settlement this time of three days 8211; if you want to be more hip 8211; the 3D settlement, it triggered off more panic on bourses around the country than if it had been a bomb threat. Almost all the small regional exchanges called the Securities and Exchange Board of India SEBI to protest against the move. They feared that the NSE8217;s shorter, parallel settlement would put an end to their existence, which is based largely on arbitrage and roll-over of positions with and from the larger exchanges. The Bombay Stock Exchange BSE also lodged a protest, but it plans to be specific about its objections only after watching the 3D8217;s impact after a couple of weeks which have several holidays in the early part of the week.

BSE sources say that its panic had a lot to do with the possible impact on its card values which had only recently seemed set to touch a high of Rs two crore. A drop in turnover due to the 3Dwould not only affect its card value, but also put in jeopardy the 14 new cards that the BSE planned to issue at approximately Rs 1.5 crore each. The BSE needs some quick infusion of funds this year to remain in the black.

The 3D may have had a quiet launch, but the market predicts its survival. It is also likely to shake up the capital market in several ways. First, it would end the roll-over of trades from one exchange to another at the end of a trading cycle. Brokers can simply switch from NSE8217;s 3D to its regular settlement in a sort of carry-forward option operating within the cash market. The other stock exchanges allege that NSE8217;s two settlements are nothing but a form of badla trading. Some even call the 3D settlement Patil8217;s badla8217; R H Patil is the NSE8217;s managing director 8211; and they mean that in more ways than one. This group accuses the NSE of hypocrisy for having denounced badla trading as primitive and pernicious and then resorting to it in order to stop losing ground to the BSE.

That maywell be true. The NSE8217;s 3D could very well be an attempt to regain its number one position and to prevent business slipping away to other bourses. But what is wrong with that? All over the developed world, stock exchanges compete fiercely to get business, market themselves to seek listing by companies and launch new trading instruments to attract fresh volumes. In fact, the BSE has never been behind in lobbying or even shuffling its specified scrips only to increase turnover, so why should the NSE not launch a new trading cycle?

The NSE argues that the 3D is not badla. It says that the overall exposure and margin limits remain the same and there is little scope for increasing them; moreover, the 3D is a stopgap arrangement, which will disappear when rolling settlements begin. It also has a set of ready answers to why 3D is different from badla. Nevertheless, let us for a moment ignore these arguments 8211; the point is that NSE8217;s quasi badla will have another unexpected consequence 8211; the pressure againstderivatives trading may finally vanish and Indian markets could truly go global.

Curiously, if news reports are to be believed, the BSE wants to find a way to continue with badla trading under rolling settlements, though nobody has been able to figure out how that will work. It has also threatened to launch its own 3D version if the NSE8217;s shorter settlement succeeds. What I haven8217;t yet figured out is, if 3D is the same as badla, and if the BSE already has badla, why would it want its own 3D settlement? However, since news reports about the BSE8217;s plans often have anonymous sources, one does not know whether they represent the official view or are just selective leaks.

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Another unexpected impact of the 3D threat is that it seems to have led to SEBI8217;s most successful meeting to date on the future of stock exchange. The smaller bourses face extinction, yet the Indian capital market presents the ludicrous picture of 23 bourses of which four are national exchanges 8211; two successful and two languishing; threeregional bourses doing moderate business through arbitrage and the roll over trades and finally the tiny exchanges which have no future. Of those in the last category, eight are in the red. Among the proposals discussed last week were:

One by SEBI, whereby smaller exchanges ensure their survival by seeking membership of one of the larger stock exchanges BSE, NSE or CSE. The members then become sub-brokers to the exchange, which in turn will be in charge of compliance, margin collections and disciplinary measures. At least nine stock exchanges seem to have approved of this route and have sought membership of the Calcutta Stock Exchange CSE, mainly because it has the least expensive membership cost and is comfortable about its disciplinary procedures.

The Bangalore Stock Exchange wants to trade in unlisted securities as a desperate measure to stay alive. The OTCEI committee is also discussing the same and for the very same reason. Some want the facilities to be used for commoditytrading.

Some are still trying to force compulsory regional listing in a bid to collect listing fees.

The BSE had offered smaller stock exchange membership through the subsidiary route or through a Memorandum of Understanding with it as it already has in 11 centres.

Then there is the case of the Interconnected Stock Exchange of India, which is against all these developments because it was to be the link between the major exchanges. The ISE which is already a platform for 15 regional bourses now plans to become a subsidiary of larger exchange to provide sub-broking opportunity to its regional exchange members. However, enforcement and surveillance of the activities of these sub-brokers will remain a complicated issue.

The SEBI needs to pick the most sensible option out of these suggestions and follow it up rigorously. The moves to start commodities trading or trading in unlisted securities are fanciful and would only make it more difficult to close down the exchanges if the experimentfails. Allowing regional bourses to seek membership on the CSE or the BSE may be worth a trial, so long as the SEBI is willing to force a closure at the first sign of trouble or failure in the monitoring mechanism. It is all very well for one exchange to invite another to be its member, but the adequacy of its trade guarantee mechanism will then depend on the self-regulation by the member exchange. In the end, the fate of the bourses will depend on the next government 8211; if it is pragmatic and simply allows unviable exchanges to close, the bigger exchanges can compete even more vigorously and also gear up for an international role.

Author8217;s email: suchetadalalyahoo.com