Depositories need cautious handling

The danger today is that the successful debut of the NSDL is making the regulator far too complacent. Look at the danger signals.

SEBI cleared the BSE- promoted Central Share Depository CSDL even though its owninvestigations into the hushed-up payments crises last June had revealed lax regulation and surveillance by the exchange. SEBI also over-ruled its Executive Directors8217; dissent note; it also ignored other factors.

SEBI8217;s also cleared the CSDL without resolving the crucial issue of connectivity between the two depositories and the companies responsible for share transfer and maintenance of the register of shareholders. The issues are sticky and complicated, yet SEBI8217;s Executive Director, Pratip Kar has been quoted as saying that SEBI will cross such hurdles when it comes to it. In fact, it seems rather silly to allow the CSDL to make huge investments in a depository unless the connectivity issue is resolved. The legal changes required could lead to indefinite delays and would prevent the CDSL from starting operations.

SEBI has allowed the CSDL to dangerously reduce the net worth requirement for Depository Participants DPs from Rs 1 crore for the NSDL to a mere Rs 50 lakhs. This becomes significantin the context of NSDL forcing Shriram Investments to cease operations for failure to create a back-up facility after its systems failed ten days ago. A DP without adequate net worth would be tempted to cut corners on systems.

The Stock Holding Corporation of India8217;s SHCIL failure to process orders in time and report them to the NSDL, led to a clogging of the system and caused the settlement to trip last month. SEBI needs to conduct a swift inspection of SHCIL as well as the NSDL, and initiate corrective action in order to boost investor confidence. Apart from Shriram, there have been murmurs of a slow down in one other large DP8217;s operations as well. Clearly SEBI8217;s decision to reduce the net worth requirement may be dangerous for the market. If anything they need to be more stringent.

At a national convention of investor groups, earlier this month, several investor associations complained of the delay in having shares transferred. The Mumbai Grahak Panchayat in particular had a serious problem withbanks who are DPs, linking their services to savings accounts or fixed deposits. The Grahak Panchayat correctly argued, that a DP cannot coerce investors into opening savings accounts. Once licensed, it has to provide a no-frills depository service for a fee, if the investor does not want other facilities provided by the bank. These are issues which will have to be dealt with as an when they arise, but the proper policing of DPs is crucial for the market. The SHCIL episode has shown that the failure of a large DP is potentially as dangerous as the failure of a bank.

While the clearing and settlement mechanism at the stock exchanges has to deal with just three or four clearing banks for its money transactions, it would have to deal with 200 or more DPs for the transfer of securities. Delays and inefficiency by the DPs could jeopardise the system. The suspension of the Delhi stock exchange member, Prasad amp; company, for allegedly hacking into the system provides another example of the need for strictsupervision. The sorry state of the BSE clearing house, as revealed by the audit commissioned by SEBI through Aneja Associates is cause for further alarm.

The BSE has to clean up its surveillance and investigation departments and free them from the interference of broker directors. Unless it can demonstrate the improvement in its systems, it cannot be considered fit to run a depository. In the circumstances, SEBI8217;s hurry to promote a second depository is only endangering the capital market. It would make far better sense, to watch the operations of the NSDL and ensure a proper regulatory environment for the depositories and DPs before kicking off a second depository. If the point in pushing the BSE8217;s depository is merely competition with the NSE, then one can only say that paperless trading, over time will increase the number of players and provide enough business in the long run for both depositories. It would even be in the BSE8217;s interest to let the NSDL handle the teething problems and spend oncreating awareness and then set up a flawless system.

Authors email: suchetadalalyahoo.com