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| July 03, 2000 | ||
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STOCK MARKETS By widening the daily variation limit of share prices to 16 per cent, SEBI has given the market more liquidity. By Sumit Mitra
That didn't happen. The fear of volatility left a scar on the mind of every agent of the capital market -- the investor, the broker and the regulator. The misgivings even deepened over time. Five years ago, when electronic trading took off in a big way, the Securities and Exchange Board of India (SEBI) introduced a "circuit filter". The mechanism automatically cut off the computerised trading link of a scrip if its price rose or fell by 10 per cent of its closing price on the previous day. The limit, which was tightened to 8 per cent in 1998, became an electronic bulwark against price rigging. But now there are signs of relaxation. Two months ago, the first step towards band relaxation was taken when nearly 100 shares were allowed to move an additional 4 per cent after the initial 8 per cent movement and a 30-minute rest period. Last week, SEBI accepted the recommendation of its Group on Risk Management for Equity Markets to relax the price band to 16 per cent, with a 30-minute "cooling period" after the scrip has hit the initial filter of 8 per cent. The relaxed price band, which will apply to 200 most-heavily traded scrips and 163 other scrips placed on the rolling settlement list, will operate from July 3. For rolling scrips, settlement is a must within five days of the trade. The circuit filter on individual scrips, other than being an anachronism (it is not practised in any developed market), proved painfully anti-investor. Since April, as software, telecom and media stocks became wonky, those who wanted to sell had to wait for another day as the falling scrip had probably hit the lower price band within the first few minutes of the morning session. The investor could find a buyer the next day if he was lucky, but the price would open still lower, leaving him poorer to that extent. The additional 4 per cent leeway for price movement (after the initial 8 per cent) did not help much because, as brokers observe, the "buy" or "sell" orders were too large to be executed within the 4 per cent limit. Things were getting even worse on Tuesday, the last day of the National Stock Exchange's settlement week. For the scrips hitting the upper or lower band that day, the intending seller or buyer had to twiddle his thumbs for another week, after forking out the price in cash. In carryforward deals, in which investors can retain their positions over successive settlement weeks, brokers had to mark the margin to the market, for which it is difficult to bill the customer. "We were taking an unacceptable payment risk due to the 8 plus 4 per cent price band," says Jinesh Jain of Crescent Securities, a Delhi-based broking firm. Stretching of the price band to 16 per cent will bring to the investor a decidedly better chance to buy or offload volatile shares before the price changes beyond calculation. SEBI has also relaxed the "volatility margin", which is the proportion of the price of a security when giving an order to a broker, the rest being credit. Till now, for shares whose prices had fluctuated more than 60 per cent in a single settlement week, a margin payment is necessary. From June 30, the margin requirement will begin at 80 per cent volatility. Only two years ago, even if a share's price fluctuated 16 per cent in a settlement week it called for a margin payment. Price bands and margins are devices that control liquidity, or the quantity of tradeable securities. In an inefficient market, illiquidity is a safeguard against a Harshad-type stock-market catastrophe. However, the more efficient the market becomes, the more the liquidity. "The market is good if there is a buyer or a seller at some price," says Ruchir Sharma, an analyst with US investment banker Morgan Stanley. SEBI's Group on Risk Management for Equity Markets, while recommending relaxation of the price band and the margin rules, has reportedly pointed out that even the 16 per cent limit should be discarded at some point. Some of the group's members are toying with the New York Stock Exchange model of putting bands at 900 points either way from the Dow Jones Industrial Average index at the previous day's closing. "Putting a circuit on the market index is a far better system than clamping fetters on individual scrips," contends another investment banker. In India, the scar of the 1992 securities scam is becoming old while the market has become safer, not riskier. Its market surely has appetite, and digestive power, for more scrip, at the right price of course. |
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 © Living Media India Ltd |
In
the demonology of India's stock exchange bosses, wild fluctuation in the
prices of shares is ranked with the very devil. The fear of volatility of
stock prices is a hangover from the Harshad Mehta days, when millions
bought the shares blessed by the Big Bull and held on to the papers even
when the prices were eroding, hoping they would bounce back.