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Tuesday, Jan 07, 2003

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Almost the best settlement

THE MOVE TOWARDS a tighter rolling settlement cycle from April 2003 is bound to improve the quality of the stock market trading system. The T+2 rolling settlement cycle, announced by SEBI, should push the Indian bourses ahead of most developed markets vis--vis trading and settlement system. That the move has come within two years of introduction of rolling settlement — initially on T+5 basis — shows the resilience of electronic trading and settlement systems, and SEBI's persistence in pushing the process forward. The latter aspect is significant as SEBI was hesitant to switch to rolling settlement in the first place. Its hand was forced by the intense price manipulation and systemic troubles in exchanges such as Kolkatta triggered by Ketan Parekh and associates. Since then SEBI has moved with alacrity in tightening the settlement cycle thrice in less than two years.

T+2 system (where open positions are settled after and within two days of the trading day) should further reduce the Rolling settlement — a far cry from the account period settlement — has reduced risks to a large extent and the tightening of the cycle in two stages, from T+5 to T+2, is a reaffirmation of the integrity of the electronic trading systems, and the depository and payment mechanisms. T+1 — which would be the culmination of the process of changing the face of the stock market trading system — now appears a matter of time and may well happen in 2004-05. No other major stock market in the world has made such a rapid transformation in just eight years. For this much credit is due to the National Stock Exchange, which kick-started the process. The BSE, a late convert, and various market intermediaries, which realigned their operations, also deserve a good word.

Now, SEBI needs to focus its attention on two areas where considerable progress is needed. One, ensure that the payment system between the broker and the customer works smooth and fast. Under the T+2 system, the exchange, the clearing corporation, the clearing banks and the depository would complete their work on a transaction by early afternoon. But, thereafter, a faster flow of payments and credits for purchases from the brokers to the investors must be ensured. SEBI could well specify tighter time-frames. Accelerating the payment part to the even T+2 day in the hands of investors should not pose any problems as banks have electronic payment systems in place, at least in the major cities. Even in outlying areas, the banking systems have advanced enough to ensure payments within a day or two.

The other area where SEBI needs to show quick progress is in stock market surveillance, enforcement and stringent penal action for violations. If in this vital area, SEBI's track record can be half as good as it has been in pushing the trading and settlement systems, it would make the stock market a better and more even-handed place for retail and institutional investors. Price manipulation, insider and informed trading are rampant despite some improvements in disclosure norms. For SEBI, this is the more difficult task, and firm progress here would enhanceits credibility.

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