Provident funds may need bourse membership

To prevent a recurrence of the HomeTrade scam, the finance ministry is planning to ask provident funds to take membership on stock exchanges and trade in gilts and equities on their own account.

According to finance ministry officials, the move was necessitated after the 1992 stocks scam, when bankers' receipts were traded by stock brokers like Harshad Mehta.

It will also avoid situations like the one the Seaman's Provident Fund found itself in, where transactions in gilts worth Rs 100 crore were undertaken without taking physical delivery.

The officials said provident funds faced big risks in the absence of a mechanism to trade directly in gilts.

While public sector banks had been directed to take membership with bourses, provident funds would be told to do so shortly, they added.

Although the finance ministry allowed banks to acquire bourse membership last year, not many are forthcoming because they generally place orders with primary dealers, quite a few of which are floated by the banks themselves.

Before screen-based trading in gilts began in October, there was little transparency in transactions undertaken by banks or provident funds. A broker could enter into a transaction with a bank at rates lower than the market.

"There was no way to monitor the over-the-counter trade with the market being dominated by wholesale traders," an official said.

The latest move would result in a spurt in the traded volume in the stock and debt markets, the officials said.

A shift from the open outcry system and the over-the-counter trade to screen-based trading not only enables order-matching but also helps in better price discovery.