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Q. Please comment on the introduction of reforms in securities markets in India and the growth of broking industry in the next two years?

A. The introduction of reforms in the Indian Securities market, which started in the year 1991, has been an ongoing process. With the gradual integration of the Securities industry with the rest of the global markets, broking business too got exposed to internationally best accepted practices and principles. Hence, the transformation of this sector was inevitable. As of today, Indian securities market has evolved benchmarking standards in transparency, online risk management at client level, reach across width and breadth of the country since Indian market continues to be predominantly represented by retail investors. Implementation of the KYC (Know Your Client) norms has boosted and enhanced the transparency standards within the securities markets and has brought them in line with the Internationally best accepted principles. At present, two nationwide stock exchanges provide T+2 rolling settlement, which is considered to be one of the shortest and the most seamless across the globe. BSE has its presence in over 2000 cities across India, which clearly underlines its nationwide reach. Allocation of resources for the IPF (Investor Protection Fund) has indeed strengthened the faith of the retail investors towards BSE. The two nationwide exchanges have integrated realtime online market surveillance with the regulator to check for any price based/ position based abnormalities in the market even at the client level. This has indeed reposed the faith in the retail investors. BSE flagship index SENSEX (30) is broad market based free float Index covering almost 50 % of the market capitalization, and being truly representative of the Indian market as it is being tracked by the Govt., Regulator, Market Participants, Fund Managers, FIIs, Investing Public, Media, etc., domestically and globally.

Q. How do you see the prospects of new market segments like currency futures and interest rate futures?

A. In its quest for greater transparency and liquidity, BSE launched its currency derivatives segment on 1st October 2008. Currently, BSE is offering Currency Futures (US Dollar-Indian Rupee contract only) through its Currency Derivatives Segment christened BSE-CDX. Currency hedging in India is now complementing to the over-the-counter (OTC) products, such as spot forwards, swaps and options. This development is expected to help in increased reliance on the exchange traded products for the reason of transparency, reach, financial settlement guarantee etc. As this market has huge potential of integrating the Indian economy with the rest of the world, with the ongoing development of financial markets, introducing currency derivatives will provide one more platform alongside the OTC currency markets. Moving forward, more exotic currency based products, like interest rate futures, would be available on the Indian bourses for the investors to trade in or having a hedging facility for covering the risk emanating out of fluctuation in the interest rate as well as currency rate.

Q. How will the Direct Market Facility (DMF) for institutional investors impact the equity broking industry?

A. (DMA) is a facility allowed by brokers to their clients to have direct access to the exchange trading system through the broker’s infrastructure without manual intervention by the broker. No manual intervention by the broker translates into complete confidentiality of the orders. Some of the advantages offered by DMA are direct control over orders by clients themselves, seamless execution of client orders without manual intervention, reduced risk of errors, better audit trails and better use of hedging and arbitrage opportunities through the use of decision support tools / algorithms for trading. This facility enhances the confidence of the clients tremendously in the system provided by the exchanges.

Q. How do you see the emergence of new exchanges like SME, energy, commodity, foreign exchange etc in the country?

Entry of new players in the exchange business has immensely contributed towards further deepening and strengthening and thus phenomenal growth of the financial markets in India. As a result of rising competition, exchanges have positioned themselves not only in implementing the internationally best accepted practices and principles but have succeeded in establishing benchmarks which are globally seen. Systemic efficiency and transparency have added further liquidity and strength to the financial sector. While there is a need to have strong nationwide Exchanges competing to serve in the areas of Commodity, Foreign Exchange, energy, etc., it is also equally important to understand the dynamics of the equity market from the experience available in other domestic as well as markets globally as it may unintendedly lead to fragmentation of the market. Also while competitive environment is the sinequanon requirement of well developed market in any stream, it is imperative to understand the consequences that may occur in the market as a result of more no. of agencies competing without any value addition to the investors. Therefore a careful and cautious approach in evolving appropriate policy frame work is desirable to avoid any possibility of having unintended results.

Q. Liquidity in F&O is concentrated in few stocks and indices. What needs to be done to improve market depth?

A. It’s a global phenomenon that liquidity is normally concentrated in the top stocks and indices. India is no exception to this normal trait. Such concentration becomes more prominent where market depth has not fully developed. It’s also seen that competition also plays a role in building increased level of liquidity in the market. In relation to derivatives market in India, competitive environment is yet to be developed. From the policy perspective, it’s desirable to prescribe requisite norms & principles to be followed by the market in relation to product specifications and at the same time leaving scope for market to evolve products complying with such norms or principles. This would not only help the market to take initiative of evolving products to broad base the product’s basket but also bring in both, added depth to the market on one hand and much-needed fair competition on other hand, which is desirable in the overall interest of the market and the investing public at large.

Q. What are the essential ingredients to make Securities Lending & Borrowing Scheme (SLBS) a success?

A. The scheme provides a facility to an investor to borrow a security to meet his settlement obligation as also offer a facility to lend a security to an investor to a borrower who is short in meeting settlement obligation. Since only the cash market offers delivery based transactions, the need arises only in the cash market. Such need is very minuscule. Thus, takers and givers are very minimal not making a market as envisaged. There are two basic needs to be addressed. One need is to allow the facility in derivative segment to demand delivery of a security at the time of maturity or while exercising the options. Such need would automatically create a demand for borrowing a security as also opportunity for lending a security. The point for consideration here is what to have first; whether vibrant SLS segment or derivative segment providing a facility to demand a delivery of a security. The experience so far of not allowing delivery in derivative segment is a good evident that though enough time and changes have been effected to SLB scheme, it has yet to become vibrant. It implies that to make this segment vibrant, there is a need to explore a possibility of allowing a facility of demanding a delivery of a security in derivative segment.

Having done so, the other most critical point needs to be sorted out. Indian securities market has reaped the fruits and benefits of efficient settlement mechanism by way of multi-fold increase in trading activity both in the cash market as well as in the derivative market; more prominently being in the derivative market creating a place on the world map. Therefore, it is necessary to evolve appropriate efficient settlement mechanism to facilitate borrowing and/or of lending of a security in the SLB segment and allowing single settlement obligation in the cash market or in the derivative market, as the case may be, in a seamless manner, of course, by having appropriate risk management frame work built-in in the settlement mechanism.

Q. What can be the long term remedy to increase Indian household savings in equities?

A. Statistically, less than 1% of the population holddemat accounts. The regulator and the stock exchanges have been conducting various programmes with a focus on education and training to impart basic knowledge and understanding about the investment in the securities market. As the secondary market has started showing a sign of turn-around, it is expected that the primary market would shortly get revived. The measures needed to have increased level of participation are – (1) providing facility of opening demat accounts in remote areas through DP network, (2) facilitating movement of funds through electronic means by extending NEFT or RTGS in remote areas with shorter timelines, (3) conducting specially designed programmes imparting education and training in relation to investment in equities/securities market on a large scale and explaining comparatives like investment in debt instruments, mutual funds, fixed deposits of banks, deposits of companies, etc to encourage take them informed decisions, and (4) offering special incentives to investors for investment in government enterprises/undertaking divestment to make them feel reaping the fruits of growth the government has achieved.

Q. What steps can be implemented for deeper penetration of the equity training programmes to the masses?

A. There has been increasing awareness about the securities/capital market for courses like CS, CA, MBAs, CFA, etc. Over a period of time, many specific programs have been developed to cater to increasing demand of ‘special’ focused courses like MBA in Capital Markets, CFA offering ‘market analysis’ etc. All those courses after Secondary education which lead to business and commerce should have one subject on Capital market and also offer specialization in each category of course on Capital Market. To really raise the awareness and understanding about the investment in equities/securities market, one subject could be introduced from 8th to 10th standards to impart basic knowledge and understanding. The initiatives taken by the regulator, the stock exchanges and various leading brokerage houses need to be further focused and strengthened with an objective to spread the knowledge and understanding about the investment in equities/securities market among large number of school going population. Even media can play a crucial role in relaying appropriate programmes for the benefits of the viewers which would include every one by having appropriate arrangements with the stock exchanges/large wide-spread brokerage houses having foot print almost across the country.