Sucheta Dalal :Cross Margining: Helps Investors Hurts BSE
Sucheta Dalal

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Cross Margining: Helps Investors, Hurts BSE  

May 21, 2008

Exclusive news, the stories behind the headlines and the truth between the lines Edited by SUCHETA DALAL

Cross Margining: Helps Investors, Hurts BSE

In the past few weeks, SEBI chairman CB Bhave has introduced a number of policy measures that tighten some margin requirements and relax others. For instance, institutional investors have been brought on par with retail ones by asking them to pay margins on a T+1 basis forcing them to bring in their money upfront. Foreign institutional investors (FIIs) (especially those with a high churn rate and more short-term outlook to investment) as well as their custodians (who lose income on float funds) are unhappy and claim that it will increase their transaction costs.

On the other hand, SEBI has allowed them direct market access through brokers’ infrastructure, eliminating the possibility of front-running on their stocks by these entities. Also, as SEBI’s circular says, it will permit faster access, lower impact cost and lesser errors.

SEBI has also introduced cross margining across the equity and derivatives segment. This helps all investors who trade in cash and derivatives. For them, margin payment is significantly rationalised; it also reduces transaction costs. Apart from reducing margin requirements, it could cut investors’ trauma at times when a sharp fall in prices creates mayhem in the market. But, this positive move of SEBI could sound a death knell for 135-year-old Bombay Stock Exchange (BSE) which has no derivatives business to speak of.

After derivatives products were introduced, the BSE has had almost seven years in which to grow and nurture the derivatives business, but has made little headway. The National Stock Exchange (NSE), meanwhile, has a monopoly in the derivatives segment and a strong cash market as well. Naturally, much of the big institutional business will shift to the NSE, further strengthening its monopoly. Once that begins to happen, the Pareto Principle (or the 80:20 rule) will kick in and the BSE will quickly lose its relevance.

Is SEBI Out to Kill BSE?

The best way to find this out is to ask the regulator. SEBI chairman CB Bhave told MoneyLIFE that the decision, as usual, was taken after discussions with both national exchanges and the BSE did not raise any objection or express fears of losing business. In fact, Rajnikant Patel, CEO of the BSE, has still not responded to our query about the impact of SEBI’s action on the bourse. Mr Bhave was emphatic that SEBI was not in favour of an NSE monopoly. He said SEBI would have to examine ways to strengthen the management and ownership structure of the BSE to figure out how to make it an effective competitor to the NSE. This may mean some significant policy changes in the near future.

So far, the BSE has merely rushed to emulate the NSE, often without success. We learn from reliable sources that, despite the appearance of a professional board of directors, there is considerable friction between some BSE board members and its CEO, Mr Patel, who had even offered to resign in the recent past. He is understood to have told the finance ministry as well as key investors that he fears a management coup by one of his senior officials. With all these goings-on, FIIs led by the Deutsche Bourse, who acquired a stake in the BSE, are also disappointed. It is not clear whether the very eminent public representatives on the BSE board have played their expected role in pushing the Exchange to set its house in order. The finance ministry is also worried about the BSE’s future and talks of taking steps to strengthen its management structure. Some of these issues were to be discussed at the SEBI board meeting on 13 May 2008.


The Hyderabad-based SVPCL Limited is one of the two companies (the other is Shyam Telecom) that were denied listing permission by SEBI after a corporate action. The company went to court against SEBI, while investors who have been denied the financial benefits of restructuring the company too were aggrieved and had approached the Andhra Pradesh High Court. On 29th February, the court disposed off the writ petition observing that the issues raised by the company would be effectively gone into by the Securities Appellate Tribunal (SAT). Since then, SAT has already had one hearing on the case. It was only then that somebody decided to update the shareholders and the media on these developments.

It also points out that the application money raised from investors remains safely in an escrow account maintained with HDFC Bank, ICICI Bank, ABN AMRO Bank, Bank of Baroda and Axis Bank (the bankers to the issue) and cannot be accessed by the company till the shares are listed. The company has pointed out that if the shares are not listed, the money will be returned with interest. If the company wanted to reassure investors, this information should have been sent by a responsible person and not by an anonymous signatory; we had to call the company secretary’s office at Hyderabad to verify if the facts, if not the email, were genuine. They were unaware of any commun-ication to investors. Clearly, Indian companies, which pick up public money while listing their shares, have a lot to learn about media and investor relations.

Karvy’s Order Set Aside

In many ways, the decision was no surprise. After SAT set aside SEBI’s Rs116 crore disgorgement order against National Securities Depository Limited (NSDL) and a clutch of other entities in November 2007, it seemed certain that Karvy would also get a reprieve. While granting it, SAT observed that SEBI has violated the principles of natural justice in failing to issue a show-cause notice and its order deserved to be set aside ‘on this ground alone’. SEBI had held Karvy guilty of helping the creation of hundreds of dubious demat accounts to corner IPO (initial public offering) allotments in the retail category through multiple applications in 2006. SAT again said that SEBI had not established any illegal gains by Karvy and was clearly unhappy at the regulator’s peculiar brand of regulation under M Damodaran, where 82 identified financiers who allegedly gained from the IPO scam were not asked to pay up, but the money was sought to be disgorged from 10 large intermediaries who made no illegal gains. The extraordinary order by former whole-time member of SEBI,
G Anantharaman, had breezily directed these 10 entities - mainly the depositories and depository participants (DPs) - to recover the money from the 82 financiers, knowing fully well that they had no powers to do so and would only end up in long and expensive litigation. The finance ministry-appointed committee to investigate the IPO scam must put an end to this unsavoury chapter in SEBI’s history where punishments were arbitrary and unrelated to the crime.

Meanwhile, we learn that the Income Tax Department has sought to be the biggest beneficiary of the multiple application scam perpetrated by Roopalben Panchal and her co-conspirators by raising a tax demand on the profit earned by them on selling the shares immediately after allotment. It seems that various authorities, including the Enforcement Directorate, have frozen the shares and there is a widely held belief that Panchal and others were merely conduits for someone who masterminded the scam. Ironically, SEBI too has been uninterested in finding out if there was such a mastermind. It has been keen on gunning for a few intermediaries, including the depository institutions




-- Sucheta Dalal