India's Stock Markets Plan to Kick the Paper Habit Investors Still Need Handwritten Certificates to Buy or Sell Stocks

Article excerpt

INDIA'S stock markets, among the largest in the developing world, may be on their way out of the Stone Age - more accurately the paper age - and in to the electronics age. Regulators have tackled two major obstacles.

One is the delay in selling or purchasing shares by paperwork. The process can take months, largely because Indian investors still use paper certificates to establish ownership of a stock. Occasionally a stockbroker here can be spotted lugging about a sack jammed with these documents.

The Securities and Exchange Board of India, the stock-market regulator, is expected to publish by the end of the month regulations that would pave the way for an electronic system to settle trades.

This same board removed the second obstacle earlier this month when it lifted a ban imposed in March 1994 on an indigenous form of margin trading called badla. Badla allowed short-term investors to buy stock on margin (a partial payment) and delay paying the full price of the share. After the ban was imposed, the volume of trading and prices fell sharply on Indian stock exchanges.

The board, which the government established in 1992, had banned margin trading because it felt that India's stock markets were not doing a good enough job of regulating it.

Stock exchanges didn't make brokers pay margins. They also didn't force brokers to convert margin trades into purchases of shares. The board suspected margin trading helped brokers rig share prices.

The board's harsh medicine, brokers say, almost brought the market to its knees. Prices fell sharply. The value of all shares listed on the exchanges fell from $189.84 billion in September 1994 to $148.84 billion in September 1995.

After the ban, trading transactions of blue-chip "A" group shares declined sharply on the Bombay Stock Exchange, the largest of India's 23 stock exchanges with 5,650 listed companies. They went down from an average of 2.85 billion rupees ($90.85 million) a day in fiscal 1993 to only 400 million rupees a day this year.

Analysts say the moves by the government will help draw both domestic and international institutional investors (the largest traders) back into the market. Over the last year, international investors - who have invested $3.6 billion dollars in Indian markets to date - had been reluctant to increase the size of their investments.

They found settlement procedures cumbersome. Also after margin trading was banned, they found it hard to sell large blocks of shares. …