strongly feels that the Indian securities market is well equipped to absorb any kind of shocks. It is efficient, economical and safe. In an exclusive interview with Business Standard, Bajpai outlines Sebi's plans for risk management and a faster settlement system.
Excerpts:
On May 17, the BSE Sensex fell by 842 points intra-day. After two trading stoppages, it rose to close the day down 564 points. Are our markets well equipped to deal this kind of volatility?
First, let me make it clear that there are laid-down rules for closing down the markets. The rules say that when the market falls by 10 per cent, it will be closed for one hour.
After trading resumes, if it falls by another five per cent or more, then the market will be closed for two hours. After two hours, when the market reopens, if it falls again by five per cent or more, then it will be closed for the day.
On that day [May 17], the market fell by more than 10 per cent, so it was closed for one hour. When it reopened, it fell again by about 7 per cent and so we had to close it for two hours. At that point of time, requests poured in from all quarters to keep it closed for the entire day. This has been done in the past.
Sebi had to take a decision whether we should follow the rule book or close the market. We decided to follow the rule book because closure of markets for the day always leads to panic and creates a crisis of confidence. It also creates some scepticism about the settlement system.
Since we were confident of our risk management system and certain that there would not be any settlement problems, we decided to reopen the market after two hours. After it opened, the market went up. In hindsight, the decision not to close the market for more than two hours was vindicated.
So, there was no problem on the settlement side....
Yes, the settlement was smooth. But one must remember that this was not achieved by Sebi or exchanges in a day. We have been trying to upgrade the risk management system, infrastructure and the margin system for brokers over the past two years.
About three years ago, the Indian securities market used to work on a T+5 trading system. It was based on an account period settlement and not on a rolling settlement system. We first decided to shift to rolling settlement "" initially for 200 securities and subsequently for the entire market.
Then, we moved to T+3, closed the account period settlement completely and shifted to rolling settlement. Finally, we shifted to T+2. All these led to a reduction of positions in the market.
When a fall of this magnitude takes place and there are large positions outstanding, the likelihood of a settlement system being unable to withstand the pressure is far higher. So, one of the risk-mitigating steps was contracting the settlement cycle.
Besides, we have built a system of monitoring, real time, brokers' positions and margins along with automatic disablement of terminals. This is unique to India.
Third, around the world, the value margin system is built between three and six sigma deviations. In India, it has been tested on a much higher sigma deviation.
It was tested on six sigma deviation about a year ago when Infosys issued its guidance and the market fell sharply. This time, I guess, the deviation was much larger. It could be eight times. This only shows that our system is built on a higher level of volatility and it can absorb big shocks.
Does that mean that Sebi's risk management system is foolproof?
I can't claim that our system is perfect. Markets are dynamic. One cannot say at any given point of time that no further improvement is required. We are keeping track of the changes and will accordingly put in place whatever needs to be done.
For instance, we are implementing, compulsorily, the straight through process (STP) for all companies from July 1. This will almost completely smoothen the process of the securities side of the settlement and eliminate all risks.
It will also remove all physical operations; contracts will be done electronically. The next stage will be shifting to the T+1 settlement cycle. Unfortunately, I cannot give a firm date for this.
Has it been delayed?
Well, I never announced the date.
I have always been making statements that the date will be announced after we are comfortable with the functioning of RTGS [real time gross settlement].
In any settlement cycle that is as narrow as T+1, the movement of funds is the most critical factor. Unless we are confident that the funds will move seamlessly, we will not shift to the T+1 system.
I am told that a number of banks are joining the RTGS and it may take a couple of months to be fully operational. Once this is done, we will take a look at the RTGS, discuss the issue with the market participants and determine the roadmap for shifting to the T+1 settlement system.
Can we expect this to be operational by March next year?
This is not under our control. The banks have to sign up for RTGS and they will have to equip their branches with proper technology. This is one area that is supervised by another regulator and, therefore, it is not fair for me to give an exact time frame.
What else needs to be done to strengthen the market mechanism?
Another area that we are looking at is setting up an integrated surveillance system. It will be done across markets and across segments along with mapping of all participants in the market through MAPIN*.
When both these are in place, it will be possible for us to analyse and study the behaviour of the market participants quickly.
Once we analyse and study the behaviour, it will be possible to correlate the findings with the risk management system and identify whether there is any area where we need to strengthen our system or bring in new measures that will help us ensure that market behaviour does not unduly influence the settlement system.
We will also know who is doing what in the market and whether there is any need for the regulator to intervene. This can be done much faster now. Today it takes time to analyse the data.
Any time frame for this?
We will put this surveillance system in place within a year. It will be highly technology-driven. No software is readily available, so it has to be developed. There could be variations in time frame but we are targeting one year.
The Reserve Bank of India (RBI) announced liquidity support to banks when the market crashed. There seems to be better coordination between regulators these days...
Yes, there is much more intense and regular coordination between the RBI, Sebi and the stock exchanges.
In fact, both the exchanges "" the Bombay Stock Exchange and the National Stock Exchange "" the Sebi surveillance staff and the representatives of the two depositories meet every Monday to take a look at what happened in the market and what new measures can be taken to make the system risk free.
What's your message to foreign institutional investors (FIIs)?
My message to all market participants "" and not FIIs alone "" is: the Indian securities market is efficient. It is very economical to transact in this market and one can be sure of the safety of the market. This has been proved by what happened on May 14 and 17 when the settlements were smooth and no broker defaulted, despite the steep fall.
You recently had a meeting with Finance Minister P Chidambaram. What's his message to the capital market regulator?
We must make the securities market vibrant, take initiatives to protect investor interest and make sure that any mischief in the market is dealt with severely and expeditiously. He also promised to strengthen Sebi.
Recently the Sebi Act was amended; it was given more powers to deal with offenders. What else can be done for its empowerment?
We will discuss this with the government. As one journeys along on the path of regulations, new issues will come up and we will request the government accordingly.
So, you want more people to invest in the stock markets?
Certainly. We want more investors in the market and we want them to feel secure.
*MAPIN is the integrated database of market participants and investors that is being created to enhance investor protection. Sebi has made it mandatory for specified intermediaries and related personnel to obtain a unique identification number (UIN) before June 30. No specified intermediary will be allowed to operate from July 1 if the UIN has not been obtained for itself and related personnel. The system will use biometrics "" fingerprinting, photographs and signature scanning "" as part of the application process.
