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Market divided over Sebi clampdown on badla

BS Markets Bureau

The market is vertically divided on the Securities and Exchange Board of India decision to ban badla. While a section of marketmen mourns the death of badla others hail the new regime. Here is a sample:

Prashant Jain, head, funds management, Zurich Asset Management Company Pvt Ltd:

Change is always difficult. Like other changes, this one also has both positives and negatives. Fortunately, the positives outweigh the negatives in the longer term, though in the short term, the impact will be negative.

The reduced liquidity in the short term is the price that has to be paid for changing over to a system that will be more in line with global practices and better understood by institutions. In any case, institutions -- both local and foreign -- were not participating in "badla" markets.

Having said this, derivatives cannot replace the liquidity that "badla" was providing in the foreseeable future. Stocks in which derivatives are not there should witness a steep fall in trading volumes and higher impact costs.

A redeeming feature is the doing away of the price bands. Though this will increase volatility in individual stocks, it will eventually result in better volumes.

Over a period of time as things settle down volumes will improve, but it will be a long time before markets attain the present volumes.

Darshan Mehta, CEO, Moneypore.com:

Stock options will be allowed from July 2, in select stocks. Sebi will separately come out with the list. Initially the list is likely to be short, catering mainly to the heavily traded stocks.

The much-expected stock futures are not being introduced at the moment. It is one of the best international practices for following reasons: l. It distributes risk from the people who do not want to take to people who want to take it. For example, if I have portfolio of 1000 Reliance shares and suppose maximum downside risk that I am willing to take is 30 per cent from current level, I can buy the put option at 30 downward filters. So, it distributes risk where the present carry forward mechanism does not facilitate this.

2. Derivative will lead to greater amount of institutional participation in the market, which will eventually create the liquidity in both the derivative and cash markets. In a sense this will amount to a larger number of people who will take opposite views on the market

3. Badla/ ALBM is a mere financing / money market instrument which does not provide a proper hedge. Derivative instrument can be used in yield enhancement and arbitrage business.

4. The introduction of derivative market will differentiate cash and derivative market and in turn cash (delivery) and speculative business.

5. It will create a higher transparency in the market.

6. It will necessarily demand and ensure tighter laws on corporate governance and insider trading. For instance, simultaneous to the announcement of the new "paradigm" new set of disclosure norms was also announced.

Niamatullah, managing director, SBI Mutual Funds:

We feel that the changes in the working of the settlement cycles on the stock exchanges will be positive for the capital markets in the long term.

The introduction of rolling settlements which is the internationally accepted form of stock trading in the cash markets was the need of the day.

However, it is also essential that this be accompanied by the introduction of a parallel derivatives market where it would be possible for investors and speculators to hedge their positions and take long-term leveraged positions on the market.

It is important to note that under the current system of badla only the retail investors and speculators were allowed to take leveraged positions. However, once the specific stock-wise options are in place, even institutions will be able to participate in the derivatives market.

The timing of the move is also such that it will have a minimal negative impact on the markets as, on a valuation basis, most stocks look cheap and the outstanding forward positions on BSE and NSE combined are just around Rs 14 billion which have to be covered up over a three and a half month period and should be easily absorbed in the market.

Unlike the general perception, we expect that the markets will adjust to the new system of trading very fast and, within one or two months, the pattern of trading and trading volumes will settle down to their normal levels.

The separation of the cash and derivatives market will also help in a better monitoring of the market place by the stock exchanges and the regulators.

Uniform settlements across exchanges are also a positive move and will result in a reduction of speculative activity. These moves will reduce the systemic risk of the markets in the long term and help the markets mature.

Arun Kejrival, CEO, KRIS:

After the 1992 scam, badla was banned. Post 2001 scam, badla has been banned again. The baby has been thrown out with the bathwater.

When Nick Leeson caused the collapse of Barings Bank, he was prosecuted and convicted but Simex did not close down futures and option trading.

They took care of the shortfalls of the system and plugged them. Nobody in Sebi wants to consider the banking system shortfalls. But, because they have a broker as a scapegoat, badla ban it is.

The necessity of markets having an element of speculation is slowly being done away with. No alternate form of margin trading has been provided, as is the norm worldwide.

Rolling settlements and common settlements are good and acceptable. But, without having an e-banking friendly environment, there is no way rolling settlements can come to T+3 mode. For the markets to be made investor friendly there must be some form of margin trading.

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