Making It Work

When Siemens became the first company to go in for de-materialisation of its shares on the National Securities Depository (NSDL), it set into motion a series of events, the end result of which will be clear only a few years from now.

De-materialisation of shares, which implies the conversion of shares from their current paper form to stored electronic data, signifies a complication in the network of the countrys stock exchanges.

While this is understandable, it also becomes clear that for any inter-connected and complex system, it is well nigh impossible to predict the impact of the change. There are just too many variables that bear on each other and the final result is always different from what was anticipated in the beginning.

 

It is not within the scope of this article to delineate the precise advantages of such a conversion. It is also does not make sense to discuss the state of affairs as if they were all in operation at the present time. For one, the movement to an electronic trading system is at present not compulsory for any company or investor; whether this is the ideal state of affairs or not is also debatable.

Moreover, NSDL, like any other new organisation, has certain fundamental issue to tackle first before it targets what are, at present, peripheral areas. Hence, we decided to focus on the possible impact of such a system on the primary market.

At present eight companies have committed to register themselves on the NSDL, including Reliance, CRISIL, and Hindustan Lever Ltd. The first question one can ask is whether it is feasible and physically possible to bring about a system whereby all IPOs, for one, come in through a depository system. The prime focus of the depository at the moment is larger companies, which is a correct move.

Going after the top 100 companies on the stock market first makes sense; these contribute more than 70 per cent of the trading volumes on any given day. Also, a substantial portion of the new issues that make the market come from these companies. Any de-materialisation of shares that takes place must necessarily start with these companies.

Theoretically, yes, agrees P Koshy, NSDL, but at the moment nothing in law says it is compulsory. It is up to the company. Prithvi Haldea of Prime, the foremost primary market database in the country, also is of the opinion that movement towards NDSL can and should be done. A cut-off date should be declared, he adds and beyond that, all IPOs should, by law, come through the electronic route.

To substantiate his point, he states that roughly between two per cent and three per cent of the existing market capitalisation in any given year comes from firms that are making issues for the first time.

Haldea believes that not only can a depository system handle these numbers but it is also an important learning experience for the investor.

And that is where the nub lies. For a depository to really succeed, it must be accepted by the retail market, i.e. the small investor. Both Haldea and Gopal Jain of VLS Finance are of the opinion that conversion of the investors shares is not going to be an easy task. The traditional attitudes of the investor is going to be a stumbling block. Take the near reverence that an investor has for paper as opposed to the bland receipt from the depository, for starters. Investor attitudes in this country, states Haldea, need to be changed drastically. At this point in time, it is debatable whether all of them are ready to accept the system.

One point of contention is whether the depository system, once in place, is going to make changes in the way business is conducted on the primary market. One school of thought has it that a depository makes it easier to track down company-related information such as promoters holding, people who are buying or selling a scrip at any given moment, etc.

According to Haldea, the data which I have on my desk, as a promoter, will then go on to be stored in someones computer