Stock markets may remain range bound

By Oommen A. Ninan

MUMBAI, MAY 6. The stock markets may remain range bound as the Securities and Exchange Board of India (SEBI) has deferred its decision on banning the carry-forward (badla) mechanism. The results of the forthcoming State elections and progress of the monsoon will provide the future direction to the markets.

``The outcome of the elections in West Bengal and Tamil Nadu may perhaps rewrite the political equations at the Centre. This along with the progress of the monsoon will decide the future movement of the Index,'' said Mr. V. R. Srinivasan, a leading financial analyst. According to him the results from some of the old economy counters, especially Grasim, have been quite encouraging. But for the confusion created by the possible banning of the carry-forward of trades, the markets would have gone up in the backdrop of such good news.

According to Mr. Imran Contractor, research head, Milan Mahendra Securities Ltd., ``With SEBI postponing the decision on badla to its meeting on May 14 and the Finance Minister making statements that he is not against badla, stock prices are likely to open firm on Monday morning. The economy remains at the cross-roads. If the monsoon is timely and normal, there might be some bounce back in stock prices.''

Cement stocks remained volatile last week. In spite of excellent results, news of a fall in cement prices due to sluggish market conditions depressed stock prices. However, a sharp rise in dispatches in April boosted sentiment with several stocks bouncing back from the lows. Grasim results have been better than market expectations with the company likely to perform even better in the future. The stock is likely to outperform if the monsoons are normal and in time.

The benchmark Bombay Stock Exchange (BSE) 30-Share Sensitive Index (Sensex) moved up by 91.83 points to 3514.59 last week from 3422.76 in the previous week. On the National Stock Exchange (NSE), the S&P CNX Nifty moved up by 28.3 points to 1130 from 1101.70. A rally in old economy stocks, especially banks and cement, pushed the indices up.

Despite the optimism of FIIs which pumped in almost Rs. 10,000 crores in the first four months of the year, the market is not showing any significant gains as there seems to be a continuous supply of stocks.

SEBI defers decision on badla

The six member board of SEBI has deferred the decision of carry- forward system. There was a feeling that the board would go by the recommendation of the SEBI group on Risk Management which had recently advised banning the carry forward system to check market manipulation. The group, headed by a member of the board, Prof. J. R.Varma, had also suggested banning deferral instruments like Automatic Lending and Borrowing Mechanism (ALBM) of NSE and Borrowing and Lending of Securities System (BLESS) of BSE and continuous net settlement (CNS). But the group suggested that the ban on short selling should be lifted from July 2 when rolling settlement in 200 stocks would be implemented.

Eventhough carry-forward (badla) system in its current form should not be encouraged, Mr. Srinivasan believes that instead of imposing stringent controls to prevent abuse of the system, a sudden withdrawal without an alternative mechanism that is understood by market players will deprive the market of liquidity. The SEBI may have its own compulsions, but the timing is not right and it is better if it waits until the proposed futures and options are well understood by participants. Also, the Government should put in place institutional funding in case it wants to scrap badla. While large scale operations of speculators should be discouraged, they are a necessity for active trading.

However, the Government and the SEBI board are under tremendous pressure to continue with the deferral instruments.

Another school strongly believes that the SEBI should ban the carry forward system with the introduction of rolling settlement in all A group shares which number 200. The trades in these scrips cover around 96 per cent of the total trades carried out on stock exchanges daily. This school also believes that the existing carry forward system is the root cause of manipulation on the bourses. It is also true that the retail investors are always taken for a ride by speculators in the present market mechanism.

There is need for a change from the present condition. If SEBI's covenant is the protection of investors then it has to ban the carry forward system. The separation of the cash market and the futures market is essential for the health of the market. Without a strong cash market, there cannot be a strong futures market. This separation may not be liked by established speculators on the Indian bourses, who comprise an influential lot.

All over the world, cash markets and future markets are separate. If this system is possible in other markets to a lesser extent in foreign exchange and commodity markets in India, why not for the stock markets? If this system is possible in the global market, why not in India too?

More than 80 per cent of stock trading in India does not end in delivery. The majority of speculators are crushing the interests of genuine investors. In every market crisis that has happened in the past, only the retail investors have been hurt. The speculators who were lobbying for continuation of the carry forward system argue that the possibility of a market crash in real because of a liquidity crunch and the inability of the banking sector to cope with the time period prescribed to clear payments. However, these reasons can be attributed only to the inefficiencies of the system.

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