Panchatantra of SEBI to facilitate exchanges

When noise, anxiety, confusion and depression symbolized our stock markets in the 1980s-90s, very few would have imagined that one day investors and brokers would be able to trade hassle-free via computers and cell phones.

In those days, you had to wait whole days, pending, even to get confirmation from brokers on basic information such as buying and selling stocks. And even after buying the shares, extracting information about the exact price paid was a herculean task.

To open an account these days, there were countless signatures required on the application form which ended in pages with several clauses, loaded in favor of the brokerage fraternity. In addition, he had to provide tons of supporting documents including a canceled check, bank documents and proof of address.

But thankfully, those tedious days are behind us. These days we receive SMS alerts almost immediately – from account opening to every step of the transaction.

Gone are the days of investors cursing their fate for not receiving stock certificates, even after paying for them or receiving duplicate certificates. No one could then have expected that one day the electronic form of share certificates would make trading less stressful. Now trading has become easy with a transaction completed in microseconds (except for illiquid stocks) with the click of a button and the transfer of stocks or funds happens seamlessly.

Revolutionary reforms

To achieve this level of efficiency, the market regulator SEBI has undertaken several innovative reforms. The first and most important was the online electronic trading platform, the idea of ​​which came from the National Stock Exchange (NSE). SEBI gave the green signal to the NSE to launch its pan-India online stock trading platform in 1994. ”), as they yelled and used hand signals to buy and sell stocks.

Interior view of the Bombay Stock Exchange.  (circa 2001) PHOTO: THE HINDU ARCHIVES

Interior view of the Bombay Stock Exchange. (circa 2001) PHOTO: THE HINDU ARCHIVES

Unlike now, a festival atmosphere reigned in Dalal Street, where the BSE (then the Bombay Stock Exchange) is located, buzzing with activity as many investors, traders and brokers gathered, and brokers reigned supreme. in master. Even members and brokers of regional stock exchanges such as Madras (now Chennai), Calcutta (Kolkata), Delhi and others were in constant contact with BSE brokers for details of trends, prices and orders on individual stocks and the market.

Now anyone can get the tick-by-tick price and volume movement of any stock. But during those days of “outcry” that was not possible and it was purely the call of the brokers and in all likelihood the buy price would be the highest of the day and the sell price the lowest. low for investors.

However, with the entry of the screen trading system, the whole scenario has changed.

Traders at the Bombay Stock Exchange.

Traders at the Bombay Stock Exchange.

Enter demat

The second key step was the introduction of dematerialization (now known as demat).

Previously, all shares were in physical form, called share certificates. For the transfer of shares from one person to another, a signed deed of transfer had to be sent to a company either directly or through a broker. After verifying the signatures, the company secretary transferred the shares in the buyer’s name. The process took at least two to three weeks if there were no other issues.

From now on, the change of ownership of shares has become transparent. Holding shares in demat form is safer than in paper form because the risks associated with physical certificates such as misdelivery, false title, delay, theft and mutilation have been eliminated. Another major advantage is that shareholders can even buy or sell a share on the stock exchange, unlike in the old days when shares were usually allotted in the hundreds.

For those new to trading, settlement of trades in this era was often fraught with default risks due to fixed settlement days. The BSE settled trades every Friday and the NSE on Tuesdays. Thus, all transactions between Monday and Thursday had to be settled (delivery of shares to buyers and cash payment to sellers) on the following Fridays on the BSE; on the NSE, trades that took place between Wednesday and Monday had to be settled on Tuesday.

Colonization reforms

As settlement was done by physical movement of the paper, it not only took time but often ended up creating confusion. Also, the settlement system had encouraged false liquidity as people could buy and sell stocks without having to pay immediately, thereby encouraging speculative activity. Harshad Mehta, the infamous stockbroker, exploited this system well thanks to the bank finance system at its peak.

Due to excessive speculation, the settlement cycle has often been extended, either due to lack of cash or lack of securities. Brokers also exploited investors through their own funding mechanism, or what was then called the Badla system.

One of the revolutionary reforms came on the settlement side, as SEBI introduced rolling settlement in July 2001. Initially, it was introduced for certain scrips on a T+5 basis (within five days from trade date (T)), then it was extended to all scripts in a progressive way in December 2001. SEBI reduced the cycle to T+3 in April 2002 and T+2 in April 2003. Now some scripts have been moved to a cycle T+1.

ASBA magic for IPOs

Another area that has improved is opening an account with brokerages. With the “Uniform Know-your-Client” standards introduced in 2011, opening an account only takes a day, unlike before, where it took at least a week.

IPO investors were always anxious. Getting an award or a refund was a painstaking process. In the days of dotcoms, when many companies were launching IPOs, it was even very difficult to know if any of them got an attribution or not. For non-beneficiaries, getting a refund was a daunting task. Investors had to race from pillar to pillar and in many cases the money would not be refunded for months for non-grantees.

During those days, investment bankers, hired by night promoters, engaged in unethical and shady activities to dupe gullible investors. To combat these abuses, SEBI initiated several measures and the most important of them was the introduction of Applications Supported by Blocked Amount or ASBA framework in 2008. In this mechanism, the amount, although blocked, will remain on the customer’s account. In the event of allocation or non-allocation, the species would either be moved or released.

Undoubtedly, with these leaps and bounds, SEBI has made trading and investing easier from every possible angle. However, a few additional initiatives such as simplifying account closures, moving towards a universal demat account encapsulating all instruments (gold, estate, bank cash, etc.) and broker account portability would make trading even more efficient.

Published on

August 14, 2022

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