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Sharp fall in Indian bourse volumes a market worry

Umesh Desai

A sharp fall in trading volumes on India's scandal-hit stock exchanges is a major near term concern as it can cause share price exaggerations, fund managers said on Friday.

"Falling liquidity could lead to erratic price movements," Divya Mathur, London-based fund manager at Henderson Global Investors which manages $60 million in Indian equities, said.

Volume on the Bombay Stock Exchange, one of Asia's oldest bourses, totalled a mere 48 million shares on Wednesday -- less than a quarter of the 223 million traded in late February.

At the National Stock Exchange, volume has fallen to 61.4 million shares from 282.15 million over the same period.

The two exchanges account for about 75 per cent of total volume on India's 23 bourses.

Indian markets were closed on Thursday for a holiday.

Analysts say restrictions on short sales and stiff deposit margin requirements imposed by the market regulator to curb excessive speculation have hurt volumes.

Those actions were triggered by a stocks slump in early March amid allegations that a bear cartel was driving down prices after learning that a prominent Bombay broker faced a cash crunch.

The top-30 benchmark index of the BSE fell more than 15 per cent in March as the scandal set off probes into insider trading and share manipulation.

MOVE TO ROLLING SYSTEM FROM BADLA

Another fund manager said the traded volumes in Indian stockmarkets were abnormally large in the past because their unique badla system, which ran on a fixed weekly account cycle was tailored for leveraged trading.

Badla refers to a share market financing system where a buyer or seller postpones his obligation to pay or deliver shares by arranging for finance on payment of an interest charge.

Funds lent are secured by the collateral of the securities involved in the transaction. The financing commission is decided by the demand and supply of funds at the end of the weekly settlement period.

"The badla system pumped up the volumes to disproportionate levels," said Sanjay Sachdev, chief executive officer at IDBI Principal Asset Management which manages Rs 14 billion ($300 million).

Fund managers expect volumes to be further squeezed when rolling settlements are expanded to include more shares, as India moves away from the badla system.

"The move to a rolling settlement will sort out this aberration to some extent," he said.

The BSE will add 200 leading shares in July to 163 which are already under the rolling settlement or T+5 trading cycle.

As investors will have to either take delivery or carry forward their trades on a day-to-day basis, speculation becomes an expensive proposition.

"Volumes will be further hit by this move," said Tathagata Guha Roy, Singapore-based senior fund manager at Citigroup Asset Management, which handles around $20 million of Indian equities.

"Speculators used the badla and the differential settlement cycles at the various exchanges to arbitrage, so the changeover to rolling mode will have a greater impact here," he said.

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