Nse Likely To Soften Stand On Indemnity Bonds Bonds

The National Stock Exchange (NSE) is expected to soften its stand on the controversial indemnity bonds. The NSE board, which is slated to meet on July 1 to consider the issue, is likely to restrict the purpose of the bonds only to fake, forged and duplicate shares.

The change in NSEs stand could end the faceoff between the NSE management and its dealers across the nation who have been opposing the concept of an all-encompassing indemnity bond.

At present, the bond is not restricted to a specific purpose even though the initial provocation for its introduction was the huge number of fake and forged shares being dumped on NSE.

 

The board is likely to view the matter sympathetically and restrict it to fake and forged shares, a top-level NSE official told Business Standard.

However, the NSE board is unlikely to set a limit on the indemnity, as sought by some sections of members.

Some members have an enormous propensity to introduce bad paper on the bourse, the official said. Importantly, even a large number of prominent National Stock Exchange members do not support the idea of limiting the amount of indemnity.

Says a leading NSE member in Calcutta: It does not make sense to limit the amount to be paid by the members to Rs 25 lakh when the member can introduce Rs 2.5 crore worth of fake or forged shares.

Another suggestion put forward by a section of the NSE members is that the exchange should not make a distinction between the ordinary and institutional members on the bourse, which means they do not want the institutional members to be let off without the indemnity.

The brokers have also said that the firms themselves should have the freedom to decide who is the dominant shareholder. Some dealers believe that the bond goes against the concept of limited liability for corporate members and against the Companies Act. This was also being seen as going against the very character of corporate membership on NSE.

However, once NSE decides to climb down on the basic issue of the all-encompassing nature of the bond and limit its scope, the NSE members are unlikely to continue the standoff on the other issues.

A major NSE broker in Calcutta says: When the exchange as an entity provides an unlimited guarantee on the trades, it has every right to seek whatever cushions it feels comfortable with. The bond is such a cushion, provided it is of a limited scope. A number of members are keen to go along with the exchange if the scope is limited.

The problem of fake and forged shares has become acute on the bourse with NSE finding that several of its members have introduced these shares into the system.

The bourse feels the members do not put in place adequate checks against such instances and also at times do not know their clients well enough. This results in fake/forged shares being introduced on the exchange and the members later being unable to meet their commitments. The indemnity bond is a measure to check this.

The indemnity bond in its present form seeks a sweeping and unconditional undertaking from the members on several key issues. NSE dealers in most major metros, particularly New Delhi, have been agitating against the bourses decision.