The kitty of the settlement guarantee fund (SGF) with stock exchanges will grow further. This is on the back of a stipulation by the Securities and Exchange Board of India (Sebi) that SEs will have to transfer at least 25 per cent of their profits to the SGF.
Currently, the SGF of the National Stock Exchange (NSE) is over Rs 35,000 crore in both equity and derivatives segments combined, while that of the Bombay Stock Exchange (BSE) is around Rs 5,000 crore. Approximately, NSE will end up transferring around Rs 150 crore and BSE Rs 50 crore to SGF annually, depending on their profits. NSE earns annual net profit of around Rs 600 crore, while the BSE’s annual net is nearly Rs 200 crore.
To bolster risk management capacity of clearing corporations, Sebi had said stock exchanges would be mandated to transfer 25 per cent of their profits to SGF.
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However, stock market experts are upset at the move. They believe the fund is already too huge and that chances of default by members are rare, given the already stringent margin requirements of exchanges. In fact, more than 90 per cent of SGF with both exchanges constitutes margins provided by stock brokers in terms of cash and bank guarantees. Therefore, in case of a default, there would not be any payment crisis. Already, exchanges transfer a part of their revenue to SGF. For instance, BSE transfers nearly 20 per cent of its revenue to the fund.
Ajay Shah, economist at the Indira Gandhi Institute of Developmental Research, does not find this the right way. “People will find ways to siphon off money,” he notes. “Thus the move may not achieve any purpose.”
According to a stock exchange official the move may only lead to a burgeoning SGF. “There is no real need for it, as risk management systems are robust, considering the margins being collected from brokers,” he notes. “In a way, it could impact the growth and valuations of stock exchanges.”
The BSE has used part of its profit to launch market making schemes to revive its moribund derivatives segment.
SGF was created in 1997 (after the Harshad Mehta scam) to ensure maintenance of market equilibrium in case of payment default by stock brokers, as well as to inculcate confidence in the minds of secondary market participants. The fund is also used when a trading member fails to deliver the security. The exchange buys the shares in the auction, and delivers the security to the aggrieved party. So far, only Calcutta Stock Exchange had to make use of SGF — to avert a payment crisis after the Ketan Parekh scam in 2001.
