Sebi shift to physical settlement may lead to impact costs widening: Limaye

The Securities and Exchange Board of India’s (Sebi’s) decision to shift stock derivatives from cash settlement to physical settlement can bring about some initial challenges to the markets. 

According to Vikram Limaye, managing director and chief executive officer, National Stock Exchange, there is a potential of impact costs widening as a result of this change.

Speaking at the 10th international convention of the Association of National Exchanges Members of India (Anmi), Limaye said, “The initial analysis for the 46-odd stocks that have been moved from cash to physical settlement is still a work in progress. There is some impact seen on the underlying markets.”

However, the move towards physical settlement of stocks is expected to benefit the securities lending and borrowing segment (SLB). “This shift provides impetus to the SLB platform, which has not seen traction in a way it was anticipated,” he said.

The markets regulator had two weeks back laid the framework for implementing physical settlement. All the stocks will be delivered physically in a phased manner in descending order, said Sebi. The first 50 stocks with smaller market capitalisation will move towards physical settlement by April this year, the next 50 in July and the next 50 by October.

This move towards physical settlement can be difficult for the traders, who typically prefer to roll over their positions than take physical delivery.

Limaye also said that it is important that financial institutions, insurers and mutual funds take necessary approvals and be a part of the SLB platform. He termed it an important part of the capital markets.

On the fall in capital raising, Limaye said the pipeline for capital raising remains buoyant even though there has been a slowdown over the last six-nine months. Speaking on other segments, Limaye said NSE was also working towards developing a product suite on the agricultural commodity space. He added that the exchange had received regulatory approvals for a few more products related to the non-agricultural space.

According to Limaye, the lack of retail participation should be a key focus area for the entire market ecosystem.  

“While market penetration has doubled over the last few years, we are still exceedingly low compared to other emerging markets (EMs). The EM averages for retail participation is 12-15 per cent and we are about 5 per cent,” he said.

He urged Anmi to continue taking up various industry-related issues to the ministry and the regulators. Transaction tax, goods and services tax and standardisation of stamp duty were some of the issues he touched upon.