The Hindu Business Line : Snap banker-broker ties in debt market

VISIT any debt market dealing room during a trading day and you will find market players stuck to phones and mobiles chatting with brokers to get the best buy-sell quotes on government paper.

Seasoned players privately admit to the debt market being a phone market with brokers providing privileged insider news to a few for a price, creating information inequality.

Typically, a banker A sells or buys debt paper from bank B through a broker registered with the NSE; and for a market lot Rs 5 crore, the broker gets a commission ranging between Rs 2,500 and Rs 3,000.

In some cases, the buyer and seller separately pay the commission while in others the buyer alone pays. It is the responsibility of the broker to pay stamp duty and the transaction fee to the SEBI equal to 0.0015 per cent of the deal value. The NSE only records the deal but has no part to play in settling or guaranteeing the transaction.

After the deal is firmed up on the phone, it is recorded on the Negotiated Dealing System (NDS), linked to Clearing Corporation of India (CCIL) and RBI. Some deals are hit directly between banks and primary dealers through the NDS with the broker kept out, but these are rare as market players have an unexplained allergy to NDS.

The NDS, introduced in February 2002 by the RBI, was meant to achieve paperless and straight through clearing and settlement of securities transactions with the CCIL as the central counterparty. The final link is the Delivery-versus-Payment system of the Public Debt Office of the RBI, where all deals are concluded.

Even after two years, market players have not given a fair trial to NDS while the RBI claims, "the system has also brought in transactional efficiency and transparency by dissemination of information on market deals and imparted liquidity and depth to the government securities market as reflected in the finer price discovery and market turnover."

Dealers contest the RBI view as they think the NDS does not aid price discovery, as it is not order-driven like the equity screens of NSE. "The NDS screen does not provide price and volume information of all the securities on a live basis and we miss out on good deals," says a dealer.

Cuts, cartels and camouflage are not rare market practices in the G-Secs market.

The Budget proposal of the Finance Minister, Mr P. Chidambaram, should push the players to NDS as it states: "With a view to simplify the tax regime on securities transactions, it is proposed to levy a tax at the rate of 0.15 per cent on the value of all the transactions of purchase of securities that take place in a recognised stock exchange in India. This tax shall be collected by the stock exchange from the purchaser of such securities and paid to the exchequer."

Technically, the Finance Minister need not waive the transactions tax on the debt market, as securities deals are not done on the exchanges. They are done on the NDS through the CCIL and RBI, whether mediated through a broker or not.

Some have raised the fear of government floats fetching higher yields with the participants factoring the transactions tax; others believe liquidity will be severely eroded.

It could happen; the government will be forced to borrow dear. The CCIL operates Collateralised Borrowing & Lending Obligation screens for banks and co-operatives and today the deals are struck by co-op banks sans brokers by directly accessing screens.

Even if Mr Chidambaram persists with the tax it will not be long before the securities market is rid of brokers.

Dr Yaga Venugopal Reddy, the RBI Governor, on May 18, 2004, while announcing the Credit Policy, had said: "Keeping in view the encouraging developments and based on the experience gained over time, RBI has constituted a Working Group (Chairman: Dr R.H. Patil), to review the performance of NDS in the context of its operational efficiency and suggest improvements and enhancements in hardware and software systems and functionalities, including introduction of anonymous screen-based order matching system. The Group is expected to submit its report shortly." The RBI should, if possible, in the next two months, put up the system fast and snap the undesirable affection of bankers for brokers.

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