Delay in abolishing physical deals led to G-Sec scam

Stock markets follow screen-based paperless trading and no carry-forward business is allowed. If an investor buys 100 shares of a company on a day, he will have to square up (ie, sell same 100 shares at the end of the day) on the same day. Otherwise he will have to pay for it and take delivery on the third day. “The RBI should put a deadline to stop physical transactions and go for paperless online trading in G-Secs immediately,” said the chief dealer of a leading broking firm.

When the Sebi and government introduced online trading and paperless transactions, market players put considerable resistance and tried to scuttle it. Likewise, the RBI and the Registrar of Co-operative Societies should ignore resistance from securities market players who are against paperless trading in G-Secs, experts say. Co-operative banks are allowed to do both physical and demat deals in G-Secs. In physical deals, a transfer deed is required and up to three weeks are needed to complete the process. Home Trade and other brokers misused this physical form of G-Sec trading and diverted funds.

‘The debt market in India is characterised by poor trading volumes despite high stock of debt issued leading to poor price discovery. Compared to a total outstanding debt of about Rs 500,000 crore (33 per cent of GDP), the average annual trading volume is only about Rs 100,000 crore, or 20 per cent of market capitalisation, which is low as compared to over 40% prevailing in other countries,’ said a study by the government’s trade and industry council.

Most of the secondary market transactions are routed through the National Stock Exchange or the the Negotiated Dealing System (NDS) of the RBI. NSE’s debt segment has seen a massive fall in the turnover after the surfacing of the G-Sec scam. “NSE used to clock a turnover of Rs 6,000 crore in the debt segment, but now it has fallen to over Rs 2,000 crore. Players have become jittery,” NSE dealers said.

While the RBI has claimed that NDS and the Clearing Corporation of India Ltd (CCIL) have strengthened the securities market, the existence of physical deals has created major loopholes in the system. NDS of the RBI virtually functions as a market, providing screen based electronic dealing, secondary market deals, electronic bidding facility in primary auctions and paperless settlement. However, many of the co-operative banks and small private banks have been resisting pressure from the regulator to join the NDS.

Although the RBI has advised all entities having SGL accounts with the RBI to become members of the NDS, it’s unlikely that many of them will follow the directive. “The main argument of these banks refusing to join the paperless trading system is the high cost involved in setting up the infrastructure. Many of the small banks don’t have that kind of exposure in G-secs,” said a senior banker.

Over 90% of the trading volume is in government securities where banks are the main players. They buy G-Secs to maintain their SLR (statutory liquidity ratio) — 25 per cent of deposits — and also as a good investment avenue.

Nearly half a dozen co-operative banks and Seamen’s PF have lost around Rs 450 crore due to the existence of the physical transactions.

Any delay in bringing paperless electronic trading and settlement would invite another scam.