The right approach

Some good seems to have come out of the ONGC share allotment fiasco. Rather than conveniently blaming it on "human error", the Securities and Exchange Board of India (Sebi) has finally realised that the mess over allotment is a symptom of the larger underlying problem that many primary market intermediaries do not have the necessary infrastructure to process large transaction volumes within a strict deadline.

The market regulator has accordingly set up a task force called SMILE (Securities Market Infrastructure Leveraging Expert Task Force) to review the entire infrastructure of the securities markets, including the equity, debt and derivative markets, as well as all participants within these markets, such as exchanges, trading platforms, clearing and settlement systems, payment systems, depositories, registrars, merchant bankers, investment bankers and other intermediaries.

That's a tall order, but it's the right approach, since a chain is only as strong as its weakest link. For instance, the recent spate of issues in the primary market showed that while most market intermediaries were able to competently handle the pressure, a systemic breakdown occurred at the registrars' end.

Identifying and then strengthening the weak links in the chain should, therefore, be the approach adopted by the task force. Clearly, the immediate focus will have to be on the outdated systems and practices in the primary market.

There's a marked divergence between the infrastructure for the secondary market, which has improved tremendously in the past few years, and that for the primary market, where half the processing work is still done manually.

The entire procedure for applications in the primary market continues to be primitive. It is imperative, therefore, to increase the levels of automation in the primary market and thereby reduce the paperwork.

One way out would be to insist that every applicant has a demat account, which would not only ensure seamless electronic processing, but also ensure that all the details about the investor are available at one place, thereby avoiding duplication of work, and involving the infrastructure available with the depositories in the issue process.

The second imperative would be to use software optimally, with a view to ensuring that, as far as possible, the required data is generated by the system, instead of having to be manually entered. A third requirement would be to introduce checks and balances into the system which would have the capability to detect errors.

The presence of very large numbers of retail participants in the Indian primary markets, in marked contrast to primary issues in the West, calls for the building of robust and fail-safe market infrastructure on an unprecedented scale.

But Sebi has done well to extend the scope of the task force beyond the primary market. Its move to ensure straight-through processing and a T+1 settlement cycle by July 1 will put a lot of strain on market intermediaries, many of which are not geared up for the process.

Brokers, for instance, have pointed to the inefficiencies of the banking system, while others have said that the problem arises in transfer of shares.

Simply put, the breakneck speed at which Sebi has moved to shorter settlement cycles has been at the cost of efficiency and investor comfort, largely because market intermediaries have had difficulty in coping with the rapid changes. The task force must listen to the problems faced by market participants before handing out its prescriptions.