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Sebi move a double-whammy for the markets, say brokers

NetScribes/Salil Panchal

The Securities and Exchange Board of India's move to recommend a ban on carry forward products with effect from July 2, 2001 - has created fresh jitters at the stock markets.

A section of the broking community said that the move would have a double impact on the markets: Trading volumes would dry up further and, in turn, volatility would increase as indices would react sharply with lower trading volumes.

Further, it will completely destroy the arbitrage market as it would be impossible to shift positions of stock from one exchange to another.

The stock markets already reacted adversely on Friday after the announcement, with the BSE 30-share Sensex closing at 3422.76, down 134.4 points (-3.78 per cent) over the previous close of 3557.19.

The Sebi group on rolling settlement has recommended a ban on all carry forward products with effect from July 2 when rolling settlement is introduced in all specified stocks.

The Sebi proposal, which is to be approved by a full Sebi board for final clearance, will mean an end to deferral products like the Automated Lending and Borrowing Mechanism - ALBM -- on the National Stock Exchange and the Borrowing and Lending of Securities System - BLESS -- on the Bombay Stock Exchange.

There are currently 176 scrips in the specified group, which will all be transferred to the rolling mode from July 2.

Sebi has already introduced 163 scrips into the rolling settlement mode on an experimental basis.

Brokers said that while the Sebi move was good for the markets over the long term (they would become more institutionalised on lines with global markets), it would prove to be disastrous in the short term (as it would lower trading volumes and liquidity at the markets.

Most marketmen said that the Sebi move would have made sense when the Indian markets were well-developed.

Already trading volumes at the Indian markets have come down sharply in the wake the ban on short sales, which was imposed in mid-March.

The total trading interest (in terms of traded value) has dipped from Rs 50 billion to Rs 15 billion over the past 8-11 months.

Milind Muchhala, analyst at Dalal & Broacha, a leading institutional brokerage outfit said, "This move will kill the markets and volumes are set to dip sharply. There will be no fresh buyers as there are few players will large funds to operate with. Thus, while the markets become more and more institutionalised, the FIIs, institutions and mutual funds will control the market."

According to Deepak Agrawal, associate vice-president, DSP Merrill Lynch Investment Bankers, said: "We have already seen the initial reaction on Friday. The liquidity at the markets will be killed further."

Navin Agrawal, senior vice-president, SVS Securities, a leading institutional brokerage firm, said: "With these scrips moving towards rolling, the arbitrage market will be completely killed. As it is most of the volumes generated at the bourses (90-95 per cent) is trade-oriented and not investment-oriented. While this move over the long-term could aid the market, over the short-term it seems to be curtains."

While the mid-sized brokerage outfits will still survive in weakening market conditions, it is the smaller sole-proprietorship firms which are likely to face the brunt of lack of business, lower brokerages, stiff trading margins and lower arbitrage opportunities.

The group, headed by Sebi full-time board member J R Varma also decided that exchanges will introduce individual stock derivatives like options and futures in select individual stocks from July 2.

This is to provide an alternative avenue for players to hedge their positions on individual stocks.

The group, however, decided against the introduction of continuous net settlement system which was supposed to be introduced as part of the rolling settlement.

This means that after July 2, 2001 there will only be a cash market with settlements to be compulsorily settled for cash five days after the trade was concluded (T+5).

A Sebi release said that, "The approved deferral product, ALBM, BLESS, modified carry forward, carry forward in rolling settlement, ALBM in rolling settlement and continuous net settlement should cease to be available for all the scrips from July 2, 2001."

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