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Brokers blame stock-lending mechanism for CSE woes

An influential section of the Calcutta Stock Exchange (CSE) operators on Saturday blamed the stock-lending system and held it as the reason behind the current bearish trend in the capital market despite "a market-oriented" Budget.

"Some influential brokers took advantage of the stock-lending mechanism after the Budget by borrowing shares from some agencies like Stock Holding Corporation of India Ltd (SCHIL) and then dumped it in the market," senior marketmen said.

"Initially, we had only doubts, but now it appears to be the real reason for such a steep decline," a director in the erstwhile CSE committee, which resigned en masse on Friday, and also an influential broker said.

Had there been no such mechanism, influential brokers could not have found shares to offer deliveries against their sales, and the bearish trend would not have been that severe, he claimed.

Even if the mechanism was there, the situation could have been avoided if proper checks and balances existed. "In this case, it appears that there were no checks and balances," marketmen said.

"Otherwise, how could some brokers manage to borrow shares and then dump it in the market?" they asked.

Stock-lending is a mechanism which gives approval to selected entities like SCHIL where a broker could borrow shares by depositing their market price in addition to some margin.

When brokers return the shares to the lending agency, it charges certain commission and returns the amount of deposit.

Brokers claimed the situation might have been worse had there been no strong buying from Foreign Institutional Investors (FIIs) during the past few days. "Never in the past had FIIs made such a huge investment in such a short period," marketmen said.

Asked what checks and balance could have been there, they said, "borrowing should not have been allowed in a bearish market and lending of shares in a bullish market."

Explaining the rationale, they said, in a falling market, if borrowing was allowed, which was the case this time, people would first indulge in short selling.

If they managed to disturb the sentiment they would then borrow shares from those agencies and put them for delivery. They would then purchase shares from the market at much lower rates and return it to the lending agency.

At this point of time, if borrowing had not been permitted, they would not have found shares for further hammering and also would have had to cover their short selling position for fear of providing delivery, which would have brought some kind of balance, they said.

Going into the past regime of physical shares, they said "during that period all shares of brokers kept as margins with the stock exchanges could not be transferred without our consent, but now with dematerialisation, some agencies were authorised to use those shares for stock-lending."

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