Nse Under Siege

Obviously, both the moves have upset the NSE management. And why not ? Here was a scheme which NSE was trying to introduce for quite some time. It made some progress and even agreed to compromise a bit by modifying the proposal in response to the brokers demand. But despite that, a few brokers decided that the indemnity bond was a scheme that they should not accept.

What was the indemnity bond scheme ? Put simply, the scheme envisaged that all brokers will indemnify the NSE against any legal claim for damages arising out of the fake or forged shares trading taking place on the exchange. There is no reason why the brokers should have objected to the scheme. Logically, the brokers ought to provide a guarantee to the effect that they will compensate the exchange for any loss or damage that their trading will cause. But brokers and logic seem to be poles apart.

 

There were also other good reasons why NSE thought up the indemnity bond scheme. The exchange had set up a settlement guarantee fund, which would be used to compensate those who lost on account of some irregularities committed by any broker. Ironically, the fund worked as a double-edged sword for the exchange.

At one level, it insured trading on NSE against any loss arising out of irregular trading like fake or forged share transactions, thereby generating the much-needed confidence in the stock exchange. But at another level, the existence of the guarantee fund also encouraged the reckless and unscrupulous elements in the trade to indulge in indiscreet and irresponsible trading. As a result, NSE had to contend with a few transactions resulting in the guarantee fund coming to the rescue of the trading parties.

This could not go on and the NSE management felt that there should be an indemnity bond scheme, which could instill in brokers a sense of discipline. But as it happens with such well-intentioned schemes, most brokers supported the idea of executing indemnity bonds in favour of NSE. But barely half a dozen brokers decided to raise a banner of protests.

Who are these brokers ? No clear answers will emerge if you pose this question before the NSE bosses. When you persist with the query, they will tell you that most of these brokers who have opposed the indemnity bond scheme, hardly do any trading on NSE.

Thus, the indemnity bond scheme could not take off. As a retaliatory measure, NSE withdrew the settlement guarantee fund for fake and forged shares. If brokers are not willing to execute indemnity bonds, why should the exchange provide any guarantee, ran the argument. That is where the controversy took a new turn. Should the NSE have withdrawn the guarantee fund?

The criticism now is that NSEs decision appears to be a retrograde step at a time when other stock exchanges have either introduced a trade guarantee fund or planning to introduce a similar facility. NSE has been a pioneer in many ways. It has been the first exchange to have introduced such a safe and secure system of trading. And this policy has paid it rich dividends. In no time, it has become the largest stock exchange in the country in terms of trading volume.

Some brokers are even suggesting that it was immature of NSE to have reacted a little impulsively to the brokers decision to abandon the indemnity bond scheme. It should have appreciated the fact that a good system in vogue should not be withdrawn in such haste and attempts should have been made to bring round the intransigent brokers.

But such criticisms are clearly an over-reaction since the damage caused by NSEs decision is not very much. All that has happened is that the brokers can realise their payments due from a transaction only after the 21-day no-objection period is over. Earlier, because of the settlement guarantee fund, payments would be made immediately after the transaction. But now NSE waits for objections to the deal for 21 days and only then it clears the payment.

Clearly, brokers want to have the cake and eat it too. They do not want to indemnify the exchange against losses against fake or forged shares. At the same time, they are up in arms when the settlement guarantee fund is withdrawn. It is difficult not to sympathise with NSE under these circumstances.

As if its discomfiture was not enough, SEBI is now examining the question of inducting brokers on the board of NSE. That is bound to create another set of controversy. NSE is the first exchange, where brokers are not its promoters. In fact, it was set up with the avowed objective of creating a transparent and dependable trading system, which can take care of investors concerns. One of the instruments chosen to achieve this objective was to ensure that NSEs board has representation only from its promoters, a clutch of all-India financial institutions. As a result, the NSE board does not have any brokers on it.

But that does not mean that brokers have no say in the running of the exchange. There is the 14-member executive committee, which manages the day-to-day operation of the exchange, which has four broker members. Also, there are several regional advisory committees and issue-specific committees, which has good representation from brokers. Yet , there is now a demand that brokers should get a representation on the board of NSE. It seems that NSE is once again paying the price for being a pioneer.