The decision by the National Securities Depository Ltd (NSDC) to take the depository route to stock lending, on paper, should take care of the risk of getting back a security which is either tainted or is a bad delivery.

Lending through dematerialised shares, again on paper, should ensure lending the basic safety in stock lending. But the reality can be very different. In any case, NSDC has a major responsibility in that the absence of a depository hitherto has lent a substantial risk to stock lending. SBI's proposed acquisition of a five per cent stake in the NSDC and its becoming a depository participant should give NSDC the strength it needs to pursue the depository route, though the nation's biggest bank has to sort out a serious operational bottleneck before getting into the depository bandwagon. For SBI, the shift to dematerialised shares is not going to be without hassles.

For, unlike in the physical segment where any breach of the 20 per cent foreign holding can be detected before the transfer of shares, such detection is not possible in the depository mode. SBI as a depository participant has only one recourse left in the circumstances, to move the Company Law Board, the authorised agency under the depository legislation to consider and deal with violations. But this is not how the NSDC should do its business. If a depository is not the ultimate in safety, then where can the investors go for cover?

This does not mean, however, that we must stick to the physical transfer and leave the dematerialised shares to debate only. Obviously, the depository route should be totally hitch-free. The constraint on detection is not a problem facing SBI only or pertaining to foreign holdings alone. Lending and buying of security must be smooth and this does not rest on mechanisms exclusively. The best of rules or systems can break down. Frauds can occur -- and often do —with the most sophisticated arrangements. A depository on paper does not mean that stock lending and borrowing is totally without hassles. A module has been thought of by the Stock Holding Corporation of India but this again is not the end of the matter.

Obviously, there have to be regular checks by NSDC and the depository participants alike. Effectively, the depository mechanism must become the ideal but rules and deployment of sophisticated computers are not going to ensure this by themselves. There is more to it than the system. Probity among different players must be fostered actively if the phenomenon of tainted shares and bad delivery is to remain one of history. For, people who have always delivered short can be expected to work out ingenious ways to make a mockery of the depository system. The essential remedy to frauds and lesser irregularities lies only partly in checks and regulations and systems. The other part is honest enterprise which can only come with professionalism, which expensive computers by themselves cannot bring about. The CLB and NSDC have a long and difficult road ahead. The holding of more seminars involving so-called experts is not going to help either. There is a lot of hype on dematerialised shares but it must be remembered that these are no magic wands. After all the agony of hold-ups in share transfers and the controversy over switching and issue of duplicate shares, sticking to the physical transfer totally would have been a raw deal to investors.

Depositories constitute a necessary reform. And the hurdles must be overcome.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.