Search the Internet          Tips  Sites: Finance, Investment

Badla ban may mean end of the line for some

Sangita Shah

Several medium to small brokers may be wiped out and the profit margins of large ones will come under pressure in the initial period beginning July 2, because of the introduction of rolling and uniform settlements and the ban on badla, carry forward and stock lending and borrowing.

The 100 per cent cash market, which will be operative from July 2 will reduce volumes at the exchanges drastically, bringing down the average turnover to roughly Rs 5-7 billion, which will be one-tenth of the present volumes at their peak.

In the national secondary market, even at the current average volumes of Rs 20 billion, foreign institutional investors and mutual funds account for only a third of the total volumes, with the balance coming in from retail investors.

Of the average Rs 15 billion retail participation, more than half is trading carried forward either under badla or through the stock lending and borrowing mechanism. Even out of the remaining half, almost 50 per cent accounts for arbitrage business, which will also be wiped out owing to the uniform settlement, market sources said.

"The stringent margining system, the limiting of the trading period to only a day owing to the rolling settlement and stronger capital adequacy norms will not only drive out the retail investor from the market but will also kill the business of brokers who deal with retail customers," Pradeep Doshi, member, Bombay Stock Exchange said.

"Though all these measures are good for the market in the long run, they will drive out retail participation at both the client and the brokers' level. Basically, trading will become institutionalised," he added.

While options trading will be available in certain stocks, it will be no substitute for the current trading mechanism where cash and forward trading co-exist.

Options trading will require separate memberships for brokers willing to trade either on their own or on behalf of clients. Brokers, now, will need dual memberships.

With different capital adequacy norms and expertise required for options, hardly any small to medium broker will be able to make up the loss in trading in the cash market.

"The cash market will have more of medium to long term buying or selling business and few retail traders will come forward under this environment. This will lead to a grim scenario for brokers," Sandeep Mehta, CEO of Gulita Securities, said.

However, some brokers, who are die-hard optimists, argue that this will be a short-term phenomenon.

Powered by

YOU MAY ALSO WANT TO READ:
The Capital Markets Crisis
The Rediff-Business Standard Special
The Budget 2001-2002 Special
Money
Business News

Tell us what you think of this report