New Delhi Dec 20: The Union finance ministry has recommended adoption of a `T+1' rolling settlement system in the country's bourses. The ministry's views have been communicated to the Securities and Exchange Board of India.

The ministry has given the example of the Cochin Stock Exchange which has already implemented the `T+1' system as an alternative mechanism along with the normal settlement option.

Under the `T+1' mode, all trades will be settled a day after transactions are made on a stock exchange. This will be different from the normal settlement which allows trading for an entire week while the settlement work is done the week after. The ministry is a strong votary for delivery-based settlements in the country's trading rings. The idea is to eliminate excessive speculation which has now come to dominate stock exchange transactions, particularly on the National Stock Exchange. The bulk of NSE's transactions are on paper and only a small percentage is based on delivery. Operators take advantage of the five-day trading period to build up large speculative positions, particularly in the beginning of the week, before getting out of them at a later date within the settlement cycle.

Sources said that Sebi was not too keen to switch to the `T+1' mode immediately. The reason apparently is that there will be a marked scaling down in trading volumes if the ministry's suggestion is adopted. Small volumes can then cause large price movements. There is also a feeling that higher volumes of trading allowed under the existing settlement results in the formation of smoother price curves for scrips and prevents share values from fluctuating wildly.

The fact that Sebi wants to go slow is evident from the fact that it had only been able to convince stock exchanges this Wednesday to adopt the `T+5' rolling settlement system and that too only for demat trades.

There are practical problems as well in the `T+1' system - for, in nationwide trading, like on the NSE, settling a deal the very next day after it had taken place is not possible if the buyer or the seller belong to different cities. The new system can only proliferate in an efficient marketplace in demat scrips or, failing this, in stock exchanges where the buyer and the seller belong to the same geographical centre.

The finance ministry is aware of the difficulties in switching only to the `T+1' mode to the exclusion of other transaction systems. It has, therefore, suggested that the `T+1' system be adopted by traders on a voluntary basis.

It is argued that there are a large number of delivery-based deals in which the buyers would be interested in completing the transaction the next day.

This is particularly true of foreign institutional investors (FIIs), whose buy-sell orders are almost invaribaly backed by shares.

Large institutional investors have, in the past, complained of the slow and time-consuming process involved in settling trades.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.