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Stock-lending reforms to up mkt efficiency
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July 07, 2006

The Securities and Exchange Board of India committee will meet today to discuss whether and in what form stock lending and short selling might come through. It is a long overdue move and it may structurally alter how trading happens. It is a very important and critical leg to have a vibrant stock lending mechanism in the market.

Executive director of BenchMark Asset Management, Sanjiv Shah feels that if both stock lending and short selling come through, it will make the markets more efficient.

He further adds that there will be a lot of issues, which need to be tackled in terms of implementation. If STT is imposed on the transactions, then it will be really expensive.

Excerpts from CNBC-TV18's exclusive interview with Sanjiv Shah:

What are your expectations and on what contours do you see stock lending coming through?

If both stock lending and short selling come through, I think it is brilliant because at the end of the day, our belief is that the markets will become more efficient. There are so many strategies that one can use in the market, which actually make sure that the futures are not trading at a discount.

In terms of stock lending, mutual funds can start earning some money. If one is holding assets for long-term, somebody might borrow from us. We make 1-2%, depending on the rate of return; which is extra return to the investor. I would be very happy if this comes through.

For a foreign player, how do you work around the loophole that you have to bring your own money? You cannot leverage or raise it from the Indian shores.

At the end of the day, I am sure that there will be a lot of issues, which need to be tackled in terms of implementation. Because if one looks at implementation, at the end of the day, a number of issues come up.

For example, if tomorrow there is a hostile takeover in any of the companies and somebody goes and borrows from an institution, in reality, the institution has not sold the stock, but it has lend it out. But the voting rights automatically move because the stock moves from one demat account to the other.

When we implement this whole thing, there will be a number of issues including money not being taken out of the country. But those will be issues related to technical implementation. But on the broader level, I think it is a great thing to do; there is no question about that.

How easy can it be for an HNI investor or even for retail? Is it going to be an institutional product largely? How does it work in the west and what typically could be the cost of borrowing stock?

My personal view is that in India we have a better system than what happens in the US and elsewhere. What happens typically in the US is that brokers lend out securities from their own accounts or from their clients accounts etc; it is quite a compulsive exercise as the systems are not in place.

In India, if the exchanges can have automated systems, then one can go into any screen, BSE or NSE and trade and then it will automatically hit your demat accounts and one can go short. That is how it is going to work. In terms of actually doing the transactions, I think it is going to be much easier.

There are 2-3 issues related to costs. If the STT will be imposed on the transactions, then it will be really expensive. Then arbitragers won't come in and if they don't, then people might not be able to borrow at a very low cost, hence the cost might go up.

Do you think that probably the market structure would go back to what the case was earlier with the added thing of futures in this market?

When you talk about the 'Badla System' not being there, I personally believe that we have a futures market. We can actually implement strategies, which we were able to do in the 'badla' market. The only thing one can't do at this point is to borrow stocks and sell it.

One of the reports say that we should allow it only in the futures stocks. I think that defeats the purpose to some extent because at the end of the day we need the ability to sell shorts in stocks. In futures, we can have an economic risk and economic profile where one can actually go short.

So if one looks at 'badla' and futures, short selling will allow everybody to take on different positions in the market and allow views, which one wants. I don't think there is much of a danger. There were other issues in 'badla' and how it was implemented, who was monitoring it and such other problems. Given that, we have systems in place and I am also worried about that.

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