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The regulator tunes into the regulated

NetScribes/Janaki Krishnan

The Securities and Exchange Board of India's decision to delay introduction of rolling settlement in carry forward scrips marks a new maturity in the regulator's outlook. Given the circumstances, it was probably the best thing SEBI could have done. The decision is also a realistic acceptance of one fact: market reforms cannot be rushed through without first ensuring the conditions conducive to change.

While the regulator could face criticism for giving in to market pressures, the fact is that it has actually put the interest of the market and investors above everything else. After maintaining all along that it would go ahead with its plans of introducing rolling settlement in carry forward scrips, SEBI has now decided to listen to the market. "What happens to investors who have put their money into these scrips and are suffering due to lack of liquidity and decline in deliveries?" was how Sebi chairman D R Mehta explained the regulator's volte face on the issue.

To determine if putting carry forward scrips on the rolling mode is feasible or not, SEBI, in consultation with the bourses, has decided to conduct an experiment - 15 scrips (already in the rolling mode) would have the facility of carry forward under the rolling mode or ALBM (automated lending and borrowing mechanism) under rolling mode or, continuous net settlement.

The exchanges can decide which of the three products they want to introduce. While no deadline has been set for this, the stock exchanges have been told to notify their readiness once their systems are in place. The selected scrips have a minimum market capitalisation of Rs 2 billion.

"The market feedback is that the introduction of any of these products would improve volumes and liquidity," said SEBI executive director Pratip Kar. "We have to infuse confidence among market participants in rolling settlement and convince them about the necessity for it."

The move comes in response to some strong signals from the market. Although it's nine months since the first ten scrips went into rolling settlement on January 10, 2000, the market is yet to get used to it. Of the 163 scrips currently in the rolling mode on the Bombay Stock Exchange, trading is actually taking place in 146 scrips, with 108 scrips reporting a decline in turnover and delivery. Brokers and fund managers have been complaining about the lack of liquidity and the considerable dip in the volumes of these shares.

As the regulator, SEBI was getting regular feedback from the stock exchanges on how the markets were reacting to its initiatives in this direction. One would then expect it to have taken this decision much earlier. "Sebi was waiting for the situation to improve. Unfortunately, it did not," explains SEBI chairman D R Mehta.

Major stock exchanges such as Bombay and Calcutta have a strong interest in maintaining the current badla (carry forward) format as volumes are high. Introduction of rolling settlement in badla scrips in the absence of suitable products would virtually kill these markets. The same would hold true for National Stock Exchange's ALBM. All three exchanges were lobbying hard to get SEBI to budge from its earlier stand on the issue.

Much as it would have liked to introduce rolling settlement as per its schedule (subject, of course, to the stock exchanges being ready with their software on time), SEBI could not overcome the stiff resistance put up by the various stock exchanges at the last meeting on 13 October, 2000.

And SEBI's loss is the market's gain. For the market now has enough time to get used to rolling settlement and work out its own ways to restore liquidity in the market.

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