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Let it roll

Aravamuthan Sasikant

Securities and Exchange Board of India (SEBI) today announced the addition of 156 stocks, which will start trading in the rolling settlement mode in a phased manner. Investors will find many of these stocks familiar as they have been touching new highs in the past few weeks. Some of them reach the upper circuit in the early hours of trading too. SEBI has targeted three categories of companies specifically:
a) 74 "new" infotech companies (companies that have changed their name and business),
b) 31 non-banking finance companies where RBI has rejected the applications for certificates of registration and
c) 17 scrips that have exhibited high volatility (over 110 per cent for seven weeks or more in the last ten weeks).

Most of these 122 companies don't have any agreement with a depository participant (DP) so the conversion will be difficult. Companies have a deadline of signing up with a DP by March 31, 2000. Here, the transition for investors will not be easy.

The other 34 companies are already in the compulsory demat segment and do not have carry forward facility. These stocks will enter the rolling settlement on March 21, 2000. The other scrips will come in on May 8, 2000.

In rolling settlement one has to compulsorily take or give delivery unlike the normal settlement where one can square up positions within the five-day trading cycle. This means that a buy order has to be backed by funds in rolling settlement.

SEBI has already introduced rolling settlement in ten scrips since January 10, 2000. The result has been a drying up of volumes and higher volatility. We compared the daily average volumes in the month preceding the introduction of rolling settlement in these ten scrips and the period from January 10, 2000 to February 7, 2000. While there hasn't been much impact on price, volumes have reduced drastically to 15 per cent.

Speculators and traders are definitely not happy with rolling settlement, as it doesn't allow them to trade without funds. A speculator says who used to trade in Tata Infotech before it entered the rolling settlement has now stopped looking at the counter altogether. An example of drying volumes is BFL Software where only 50 shares got traded on January 25, 2000 on BSE.

But institutions welcome the rolling settlement as this will align the Indian markets with the world. Though liquidity has reduced, they expect volumes to pick up. They are also prepared to accept the extreme price movements with abysmal volumes that one witnesses in these stocks.

Dileep Madgavkar, chief investment officer, Prudential ICICI Asset Management, puts it succinctly: "We know that in the short- to medium-term, liquidity will drop phenomenally and there will be extreme volatility in the short term with abysmal volumes. But volumes will pick up ultimately once the necessary financing mechanism is in place."

So the regulator will have to ensure that proper financing facility like stock borrowing/lending or a carry forward mechanism is available to the investor. Rolling settlement also paves the way for the introduction of hedging products like options and futures in individual stocks.

Declining volumes

Note: Average daily volume and closing price are for one month before and after the introduction of rolling settlement on BSE.

Stocks

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