Sebi moving on secondary mkt reforms

Liquidity, derivatives part of various items on agenda.

The capital markets regulator, the Securities and Exchange Board of India (Sebi), has set its sight on reforms in the secondary capital market.

The agenda includes improving liquidity in illiquid stocks, diversifying the derivative segment and making ownership of security market infrastructure companies such as stock exchanges and depositories more transparent and increasing the net worth of market intermediaries, said a Sebi official.

It feels this would be timely, as competition among exchanges is set to increase in the coming months, with many new players aspiring to start trading in various segments.

Sebi had already asked stock exchanges to improve liquidity, as 90 per cent of the turnover comes from just 100 traded companies. There are thousands of companies where liquidity is shallow and buyers don’t get required quantities without significantly influencing prices. Similarly so, when one wants to sell.

Stock exchanges have made some beginning by sponsoring research from independent agencies like Crisil for companies not traded and not researched by analysts. The National Stock Exchange (NSE) has already sponsored research of companies listed on the Madras Stock Exchange, with which it has signed an agreement; those listed on MSE can be traded on NSE, too. It has plans to cover NSE-listed companies, too.

Sponsoring independent research for less liquid companies is new to India but the London Stock Exchange sponsors research for companies listed on its AIM segment. The Singapore, Hong Kong and Malaysia stock exchanges also do this. Both NSE and the Bombay Stock Exchange, the two main ones, are also working on measures to improve liquidity in low-traded companies.

Sebi has also begun the process to diversify derivative segments. In the next few weeks, options contracts will be permitted in the currency futures segment in dollar-rupee contracts. Options are very active on the equity derivative segment of NSE.

Next in derivatives would be trading in the volatility index. Only NSE is eligible for this and in the next few weeks, it plans to start disseminating the index on a real time basis and in a month or two, trading will start. Volatility is an indicator for market movement and is decided based on trading in call and put options.

Settlement rules
Sebi has also allowed in-principle physical settlement in equity derivatives. The regulator has already initiated consultations for this. The issue being contemplated is whether options contracts can be settled in delivery.

This is permissible abroad but in India, according to data compiled by Sebi, out of total derivative volumes, options constituted 58 per cent. This mainly comprised trading in index options (55.6 per cent). Most stock options are illiquid and hence delivery-based settlement is difficult. The first round of meetings with exchanges to deliberate this have been completed.