N MadhavanÎThe Madras Stock Exchange (MSE) is adopting a `wait and watch' attitude with regard to the interconnected market system (ICMS) mooted by the Indian Stock Exchanges Services Corporation Ltd (ISESC). A team from ISESC was in Chennai last week and made a presentation to the members of MSE.

A cross-section of MSE brokers, when contacted by The Financial Express, were divided in their opinion as to whether to join ICMS or not. Some felt it was a good option while others were apprehensive about the extent of benefits that would accrue by opting for ICMS. They seemed to prefer BOLT. The consensus emerging was to wait and watch before taking a decision.

In the final reckoning, the cost factor could prove to be the deciding factor. As per the project report prepared by ISESC, the cost of the project is estimated between Rs 10 crores and Rs 12 crores. The recurring cost is expected to be around Rs 4.50 crores to Rs 5.50 crores per annum. Top officials of MSE are sceptical about the project cost. They feel that the project of this magnitude which involves development of software, hardware, a central clearing house and an headquarters at Mumbai cannot be accomplished within the estimated cost. The project report provides for four sources of funding. The first option is the exchanges contributing about Rs 50 lakhs to Rs 75 lakhs each depending on the number of exchanges ultimately joining ICMS. The second option is auctioning 10 membership rights at each participating exchanges. The third is using the debt route with lower initial contribution from the exchanges and the final option is the use of suppliers credit. Even at the existing project cost, the investment per MSE broker could be significantly high. The first means of funding is almost ruled out as MSE is having liquidity problem. It is in no way capable of funding Rs 50 lakh or Rs 75 lakhs. This means that the members have to pool in the money. The extent of money that they must contribute would depend on the number of members opting for interconnectivity.

Today there are only about 50 odd members actively trading at MSE. Assuming that they opt for it then investment per broker works out to Rs 1.50 lakhs. To this should be added the cost of hardware. According to exchange sources, the present policies of the Government does not allow transmission of data received through V-Sat by way of telephone lines (leased lines) beyond the premises where V-Sat is installed. As MSE has leased line based wide area network (WAN) each member has to install a V-Sat unless the policy is changed. This would entail an additional investment of about Rs 2 lakhs.

As per the project report, every exchange has to create a trade guarantee fund and a settlement stabilisation fund. MSE at present has neither of this. Even assuming that MSE sets up a trade guarantee fund for the inter-market trades alone for about Rs one crore, each participating member has to put in about Rs 2 lakhs on this account. Added to this is the further base capital he has to bring for having sufficiaent capital adequacy to trade in both the regional exchange and the inter-connected market.

Thus a member has to bring in about Rs 7 to 8 lakhs. How many brokers would be willing to bring in this amount remains to be seen. Some are willing to borrow but they want to be doubly sure about the returns. As most of the exchanges which have agreed to participate are small ones they are worried over the extent of benefits that will accrue. If the third and the fourth option are opted then the initial investment could come down but the transaction cost would increase and ICMS may not be able to compete effectivly with National Stock Exchange (NSE).

Top officials at MSE are hearing the views of the members and any decision would be taken only after through analysis, they say. They do not want to close the option either as they opine that the concept per se is good.

But doubts lingering on their mind with regard to amount of investment, implementation of the project and the extent of benefits are forcing them to tread carefully.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.