Chennai, August 12: The committee set up by the Madras Stock Exchange (MSE) to look into the modalities of setting up a settlement guarantee fund (SGF), has recommended a corpus of Rs 3.85 crore.

The recommendations, it is learnt, are in line with the guidelines issued by the Securities and Exchange Board of India (Sebi). According to exchange sources, MSE will now submit the proposal for Sebi's approval after the governing council approves the recommendations.

The corpus was arrived at based on the loss likely to be incurred if the top 10 brokers were to default at the same time in a particular settlement resulting in a loss of 20 per cent on their positions. The highest payout in the previous year has been taken as the yardstick.

Contributions from the members are expected to fetch Rs 2.40 crore (120 active members contributing Rs 2 lakh each). The contribution of the members would be towards the additional base capital and the same would be used for setting up the SGF. MSE has made arrangements with a nationalised bank to lend to its members and the bank has reportedly given an in-principle approval for lending on a case-to-case basis.

Sebi guidelines make it mandatory for stock exchanges to contribute to SGF and the bourse contributions should not exceed its free reserves. MSE is likely to contribute about Rs 1.45 crore. The exchange, which is facing an acute liquidity crunch, is now looking at various options to generate funds for making the contribution.

Unlike the Bombay Stock Exchange, where performance guarantee of the members forms a part of the SGF, the one proposed by MSE would only have cash component. Yearly accretion to the corpus is expected to be in the vicinity of Rs 85 lakh by way of service charges (.01 per cent of turnover) and interest on investments.

The guarantee fund will not cover fake and stolen shares and can be drawn only after the member is declared a defaulter. This is interesting in the case of MSE because there are many brokers who defaulted but have not been declared defaulters.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.