After the reforms, the trading and settlement cycle was trimmed from 14 days to 7 days. Later, on, securities were traded and settled under a uniform weekly settlement cycle, trades accumulated till the end of a specified period and the positions were settled in the form of payment of cash and delivery of securities. The carry forward system prevailed for a long period at stock exchanges as it increased the volume of trading and thereby added to the liquidity of the system. However, it also increased speculation which increased volatility in prices and defaults by brokers, thereby impeding the price discovery process. Hence, an alternative system called rolling settlement was introduced in a phased manner.
Under the T+5 basis rolling settlement system, the trading cycle comprises one day and transactions in these securities are settled 5 days after the trade date. The rolling settlement on a T+5 basis was introduced in 10 scrips in January 2000, then extended to another 153 scrips in May 2000, then to 414 securities in July 2001, and thereafter all scrips were covered under this system. The rolling settlement system is on a T+3 basis since April 2002 and T+2 basis form April 2003. Effective implementation and success of the rolling settlement requires electronic fund transfer facility and dematerialization.
Dematerialization of Securities:
To eliminate various problems such as theft, fake/forged transfers, transfer delays, and the paperwork associated with physical certificates, an electronic book entry form of holding and transferring securities has been introduced. Investors have the option to hold securities in either physical or dematerialized form. In order to expedite the process of dematerialization, SEBI has mandated the compulsory settlement of trade in demat form in certain select scrips. Securities issued through initial public offering can be settled only in dematerialized form. Henceforth, all IPOs will be issued is dematerialized form. To depositories – National Securities Depository Limited (NSDL) and Central Depository Service Limited (CDSL) – offer trading facility in dematerialized form. The dematerialization process is almost complete and more than 99 per cent of the turnover settled by delivery is in a dematerialization form.
On the instructions of SEBI the stock exchanges have developed a comprehensive risk management system to promote a safe and efficient market. Stock exchanges have laid down trading rules and regulations for broker members set up market surveillance systems to curb excess volatility, created trade/settlement guarantee fund to ensure timely settlements even if a member defaults to delivery securities or pay cash, and set up a clearing corporation to guarantee financial settlement of all trades and thereby reduce credit risk in the settlement system. The Clearing Corporations matches the transactions, reconciles sales and purchases and daily settlements. It is also responsible for the risk management of its members and conducts inspection and surveillance. It also collects margins, capital and so on from members and monitors their net worth requirement. It major role is to ensure the fulfillment of every contract either by becoming a counterparty itself to every trade or by guaranteeing performance of all trades. This risk management system was absent in the pre-reforms period and the setting up of the system is one of the landmark achievements of financial market reforms.
Secondary Market Structure as on March 31, 2001:
Stock Exchanges 23
With screen based trading system 23
With Internet trading 02
With equity trading 23
With debt market segment 01
With derivatives trading 02
With settlement guarantee fund 16
Registered members (brokers) 9,782
Registered foreign brokers 38
Registered corporate members 3,808
Registered sub-brokers 9,957
Registered FIIs 506
Listed companies 9,922
Market capitalization Rs 7,68,863 crore
Turnover during 2000-01 Rs 28,80,990 crore