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New pledge system is a good begin, can we think of real-time settlement now?

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There have been three really watershed moments within the historical past of Indian capital markets. The primary one got here in 1994 with the launch of NSE, which enabled the migration from a bodily outcry trading flooring for equities to a full digital trading platform. The second, in 1996, was the dematerialisation of securities, which rid us of the ache of bodily share certificates and handbook shares switch. And the third was when the Indian regulator determined to ban the indigenously advanced conventional inventory financing system known as ‘badla’ and later changed it with the choices & futures market in 2001.

Aside from bringing in transparency, these developments undoubtedly did wonders by rising trading volumes and lending extra depth and resilience to the market. They supplied a seamless and clear trading spine, offering nice ease of entry to traders. The frequent underlying issue driving all these modifications was the use of know-how.

Having witnessed the implementation of all these path-breaking initiatives, I might say every time the regulator launched such offbeat and progressive concepts, there is often a basic discomfort within the trading group. Murmurs in regards to the havoc such modifications might set off are all the time abound. This is fairly comprehensible, as these are revolutionary and unconventional steps.

The present Sebi choice to streamline the margin money mechanism by a pledge and re-pledge (PRP) system is one other such radical use of know-how. The requirement for pledge of securities arises as a result of traders and brokers want to supply upfront margin money for each trade they do. This margin money can be within the kind of money, idle shares mendacity in a demat account that may very well be pledged, authorities securities or financial institution fastened deposits.

The query that comes up is why did we want this transformation? Within the earlier system, brokers used to take a energy of lawyer (PoA) from their purchasers, which allowed them to entry their purchasers’ demat accounts. This was required for the brokers to maneuver the shares from consumer accounts to a separate account for the aim of collateral for margin money. The shares have been additional transferred to the clearing company as margin. Sadly, this association was liable to misuse, and there have been conditions of such nature. Due to this fact, Sebi’s choice to exchange the PoA system with the PRP system is a particular step ahead in direction of creating a extra sturdy course of.

Beneath the brand new system, purchasers simply must pledge the shares mendacity of their depository accounts with NSDL or CDSL in favour of the dealer and the identical develop into obtainable for repledge to the clearing members. Thus, the securities would now stay within the consumer’s account with the depositories and needn’t be transferred out to every other account. Ultimately, it’s a clone of the ASBA course of adopted in IPO bidding.

There are a number of benefits of this new system. First, now the shares or securities of one investor can’t be used as margin money for every other investor. There is no chance of intermingling of securities. Secondly, shares or securities of unknowing or inactive traders can’t be pledged to banks/NBFCs to finance one other account. Lastly, because the securities wouldn’t go away the precise proprietor’s demat account, the company profit on them would proceed to accrue to the proprietor.

Because it usually occurs within the implementation of any new system, there was teething issues within the preliminary rollout, which have led to a drop in trading volumes. In fact, it is compounded by the truth that some market intermediaries have been anticipating a deferral of the brand new course of and weren’t totally ready for it. I consider as an instantaneous motion this is a good try by Sebi to streamline this space of concern utilizing know-how.

For my part, although, in the long run this is nonetheless the penultimate step. The way in which we took the lead in shifting all the trading platform on-line, the best way we moved from bodily to digital shares, we want to maneuver to a real-time securities settlement (RTSS) system. Although I’m no professional of know-how, taking a cue from real-time gross settlement (RTGS) in place for switch of funds, this appears doable. And given the good observe file this authorities has had with digital initiatives like Aadhar, digital well being file, faceless income-tax evaluation and appeals, I’m positive this can be conceptualised and executed seamlessly. It can certainly be one other huge feather within the cap of our capital markets, which have already develop into one of probably the most environment friendly markets on the earth.

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