The Hindu Business Line : More power to paperless trade

THE PROPOSAL OF the Securities and Exchange Board of India requiring companies to pay a one-time fee to a depository institution is welcome as it would ensure that the cost of sustaining a paperless market in equity shares is borne by the participant that stands to gain the most from the system. Dematerialised trading in the secondary market affords companies superior logistics in handling ownership claims besides allowing them to offload on the depository the work relating to such corporate actions as payment of dividends, issue of bonus shares, share buyback or stock splits. Above all, a paperless environment promotes trading volumes (there has been a manifold rise post-demat), and enhances the attractiveness of the stock for institutional investors, especially the FIIs used to such systems in advanced markets. The resultant efficiencies in price discovery would translate into an effective reduction in the long-term cost of capital. Corporate India enjoyed this benefit the past three years ever since the trading and settlement architecture was shifted to the paperless mode. But it has not been footing the bill. This is clear from the fact that only a handful of companies has on its own decided to make a one-time payment.

There is thus a clear case to make this fee a part of the Listing Agreement, as suggested by the SEBI committee. Only a mandatory requirement will ensure that listed companies pay up. Having laid down a time-bound programme for different sets of stocks to go paperless, SEBI has to now take the process of market reform to the next logical step of making the beneficiaries (companies) underwrite the costs involved. Initially the top 100 companies by market capitalisation can be asked to pay the fee and gradually more corporates drawn in. As the amount is to be mobilised by a regulatory fiat, SEBI should ensure that the corpus is invested in gilt-edged securities and the surplus, after meeting operational expenses and a reasonable return on shareholder investments in the depository business, should be ploughed back for investor education or other programmes aimed at overall improvement of the market.

Exempting small investors from the custodial fees is a welcome initiative but the SEBI criterion of a small investor is rather liberal and could do with some tightening. The proposal to rationalise and make uniform the charges structure which the depository participants (DPs) adopt should bring about the much-needed transparency and simplicity to the payments that investors have to make for the service. It would also ensure that the DPs operate within the regulatory framework on the issue of expenses charged to investors. As the demat business has become a large-scale and standardised service, there is a case for a uniform, and perhaps lower, fee structure. Proposals such as allowing small investors to switch between DPs without any costs, shift from a flat fee system to one linked to value of trades, and exemption from account maintenance and demat charges are bound to lure more investors into the fold without straining the finances of the DPs.

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