Page 40 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 1: Introduction to Capital Market

delivery. Trading in share for clearing, or 'forward trading' was common banned in India Notes
in 1969. It had a very adverse effect on share prices. The situation was further aggravated
in 1974 restrictions put on dividend by companies as part of the anti-inflationary measures
adopted by the government. From 1974 onwards, under a scheme first evolved by the
Bombay Stock Exchanges and thereafter accepted Calcutta, Delhi and Ahmedabad, a certain
informal type of forward trading was revived. This was done by carrying forward the
delivery contract beyond 14 days in an informal manner, by concluding the earlier contract
and entering into a new contract without any actual delivery, but merely by payment of
the balance between the country price and market price, between the buyer and the seller.
This system had been continued for selected securities often called cleared securities, in an
extra-legal manner without anyone questioning its legality. In 1981, government at long
last proceeded to permit the revival of limited volume of forward trading. This was done
reviving the previous practice of trading in cleared securities, but by permitting carry
forward of contracts beyond days up to three months. The real problem however, still
persisted. While a certain volume of forward trade useful for providing liquidity and
avoiding payment arises, when speculation runs riot and the actual price transfer of
securities lies far behind, there will inevitably be a payment crisis.
5. Outdated Share Trading System: The share trading system followed in Indian stock
exchanges, when matched an international prospectus is thoroughly outdated and
inefficient. Major problem areas include settlement periods, margin system and carry for
(badla) system. To prevent the risk of the rise of shops outside the stock exchange system,
all transactions in all groups of securities in the equity segment and fixed income securities
listed on stock indices are now required to be settled on T+2 basis. Under rolling settlement,
the trades done on a particular day after a given number of business days. A T+2 settlement
cycle means that the final settlement of transactions done of ‘T’, i.e. trade day by exchange
of monies and securities between buyers and sellers takes place on the second business
day after the trade day. Avoidance of margin payment under the margin system is a
problem area. Margin system is the deposit which the members have to maintain with the
clearing house stock exchange. The deposit is a certain percentage of the value of the
security which is being traded by them. Under the margin system, if a member buys or
sells securities marketed for margin above the free limit, a spot amount per share has to be
deposited in the clearing house. Before we point out major weaknesses of the margin
system, we may distinguish it from margin. Margin trading means that a customer buys
a share paying a portion of the purchase price. The portion of the purchase price paid by
the customer is called margin. For example, if a customer purchases shares worth 1 lakh
market value by paying 60,000, he is in trade paying a margin of 60%. In this case, the
balance is being lent by the broker and the securities bought be collateral for the loan and
have to be left with the broker.
6. Lack of a single market: Due to the inability of various stock exchanges to function
cohesively, the growth in business in any one exchange or region has not been transmitted
to other exchanges. The limited inter-market operations have resulted in increased costs
and risks of investors in smaller towns. This problem has been further aggravated by the
lack of cohesion among exchanges in terms of legal structure, trading practices, settlement
procedures and jobbing.
7. Problem of interface between the primary and secondary markets: The recent upsurge of
the primary market has created serious problems of interfacing with the secondary market,
viz. the stock exchanges which still, by and large, continue with the same old infrastructure
and ways of long which suited the very narrow base of the capital market in the yester
years but are totally out of tune with fast market and the desired tempo of work at present.
Unless the secondary market is re-oriented so as to take charge of the new responsibilities
cast on it by the recent developments, this will act as a drag on the future preface serious
problems while trying to buy or sell scrips.

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