Filters Need To Be Relaxed Further

Anand Rathi, president of the Bombay Stock Exchange (BSE), was instrumental in restoring the sheen to the bourse after the Securities and Exchange Board of India (Sebi) sacked the bourse's former president Jasubhai Parekh and other board members.

During Rathi's reign, the average daily volume on the bourse has risen by more than 110 per cent from Rs 1,285 crore to Rs 2,700 crore.

He was responsible for introducing the `Z' category, a section where scrupulous companies are put-in. In an interview to Business Standard, Rathi spoke on various subjects which could improve the functioning of the local markets.

What are the factors affecting Indian markets?

 

There a three or four which are playing a crucial role. International trends, short-term money flowing into and out of the Indian bourses, excessive speculation without adequate cash margins and the virtual absence or limited number of strong players are some of the reasons which may be having an adverse effect. These factors collectively play a dominant role at the Indian bourses. Unless measures are initiated for correcting some of the variable factors, local bourses would continue to remain volatile.

What impact do international developments have on local bourses?

The local markets are not any more isolated from international events. It would be interesting to note that there is an increasing global linkages correlation between the Sensex and other international indices. For example, the Nasdaq in 1998-99 had a correlation to the Sensex of only 0.25. However, during the current year, the correlation has shot up nearly three times to 0.78. Even the other Asian markets are having a close linkage to India. Hong Kong's Hang Seng index' correlation to the Sensex rose from 0.45 last year to 0.75, while that of Japan's Nikkei shot up to 0.85 this year from 0.51 last year. Therefore, any major financial event in one market has its repurcussions on other markets, directly or indirectly.

What do you mean by short-term money?

Currently, more than 90 per cent of the Indian market is driven by short-term funds. By short-term, I mean the money flow to the markets is essentially from speculators, day traders, mutual funds and high net-worth individuals. One would refer these finances at `hot' money. The first two categories are those which generally trade in any stock depending on market rumours and would like to encash profits at the end of the day.

I would also put the other two categories under short-term money as they are periodically faced with redemption calls, though the period is between 3-12 months. Any redemption pressure will compel these funds to sell the best of the stocks at even throwaway prices. Long-term money means those finances which usually trickle down from insurance companies, pension funds and provident funds. This is clearly lacking in India. In my opinion, at least 25-30 per cent of the money should be of long-term nature as this would bring stability.

What measures would you suggest to safeguard investors?

The day traders, speculators and relatively short-term players, who treat the stock markets as a gambling den, should be imposed a minimum 20 per cent cash margins across the board. The idea is to protect these small investors who are likely to loose their capital in a day-trading if any unfavourable news come by.

Currently, as per Sebi norms, minimum margins enforceable are 30 per cent, but at the BSE we are imposing around 50 per cent. I am also strongly advocating for a 50 per cent cash component margin. This would deter unwanted elements and the markets would be more healthy.

What positive points do you see in the Indian markets?

The recent quarterly results of companies portray an encouraging picture. The estimated projections of analysts and marketmen are more or less achieved. Now, with the fundamentals strongly in place and economic growth & gross domestic product (GDP) on the rise, one could take a positive view on the markets. Further, foreign institutional investors (FII) funds are at an all time high which is a motivating factor. Other positive factors are the 11-12 per cent growth in exports, lower inflation and interest rates, and a stable Central government.

However, the single most important positive news is the approval of the IT Bill by Parliament.

...and what are the negatives?

The looming fiscal deficit, slow pace of disinvestment in public sector undertakings, and the drought in Gujarat are a few of the negative factors which could have an adverse impact. However, taking all factors into consideration, the markets could be looking more for an up-side than a down-side.

What are your views on filters?

Artificial barriers cause greater damages to the markets. General investors and mutual funds had been asking Sebi to relax circuit filters as they had difficulty in buying and selling stocks. In fact, circuit filters lead to higher volatility by artificially freezing prices at the eight per cent lower or higher filters.

The current modified circuit filter of 8 + 4 is a welcome step. We are at least witnessing volumes clicking between the 8-12 per cent band. This is a clear indication that the manipulative activities are reduced with price bands being relaxed.

As practised in most developed markets, the circuit filters should be further relaxed to enable free play in the market. This does not mean that the bourses are being exposed to greater risks. With relaxation of the margins, the cash margins should be increased accordingly. The margin system should be in tandem with circuit filters.

What about margin trading?

A long-term policy on captial market financing by banks is long overdue. Banks should be allowed to finance carry-forward transactions. There are no risks involved as exchanges collects nearly 25-35 per cent margins an any carry-forward positions. This would help ideal bank funds to procure attractive returns.

Secondly, the limits on carry forward need to be relaxed from the existing Rs 20 crore per broker. With participation from foreign institutional investors, Indian markets are becoming global themselves.