The Hindu Business Line : A toast to regulators

A toast needs to be raised the Indian stock exchanges and the market regulator who ensured that our markets functioned smoothly through the intense volatility in 2008, without resorting to ad-hoc measures adopted in other countries such as long-drawn trading halts, freezing index levels, banning short sales and so on.

Nor did the market turbulence deter the Securities and Exchanges Board of India (Sebi) from introducing numerous investor-friendly measures. The more prominent of these were the Application Supported by Blocked Amounts (ASBA) and Direct Market Access (DMA).

ASBA was aimed at ensuring that investors’ funds left the bank account only on allocation of shares in public and rights issues. However, investors are yet to reap the benefits of this measure as initial public offers have all but dried up this year.

DMA allows institutional investors to directly enter trades into the exchange trading system without manual intervention by brokers. This move too is likely to have long-term benefits in improving the ease with which institutional investors execute trades.

SHORT-SELLING

The reintroduction of short-selling in cash and the Stock Lending and Borrowing Mechanism (SLBM) that was initiated along-side, however, proved to be a failure. The short tenure (seven days) of the short selling contracts and the need to settle it through securities was perceived as a deterrent.

Since traders were already shorting stocks through futures and options, this measure was completely ignored by market participants. Perhaps some tweaking of the regulations along with a more buoyant stock market can draw more market participants to this scheme in future.

The big success story of 2008 was the launch of currency futures. This was a ploy to lure some of the business from the $34 billion over-the-counter foreign exchange market and help the beleaguered brokerage houses that were grappling with slowing turnover. High volatility in the rupee-dollar movement has made the turnover in this product more than treble on the National Stock Exchange since its introduction in September.

Volatility index

The other high-profile launch of 2008 was the India VIX or the volatility index that measures the level of trepidation among the investors. The VIX recorded a peak at 90 on October 27 and then surpassed it on November 14 to record an all-time high at 92.

The massive fund outflow from Indian equities, exceeding $13 billion, dictated the actions of regulator in the last quarter of 2008. SEBI reversed the strictures on off-shore derivative instruments (ODI) imposed a year ago in October this year. This meant that ODIs with derivatives as underlying and those issued by FII sub-accounts need not be wound by March 2009.

There was another skirmish involving the FIIs in October. It was discovered that they were lending stocks held as participatory notes to overseas entities that were, in turn, using these to short-sell and batter prices in the Indian market. It was, however, discovered later that the quantum of shares lent was insignificant and this practice was easily curtailed by SEBI expressing its ‘disapproval’ and by asking FIIs to divulge information on shares lent by them on a periodic basis.

Other measures initiated by SEBI in 2008 include increasing the ceiling for the shareholding in stock exchanges from 5 per cent to 15 per cent for certain classes of investors, reducing the time taken in rights issues, allowing promoters to increase their stakes up to 75 per cent through creeping acquisition and restricting early exit from close-ended funds.

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