Market participants say there has been a marked shift to the physical segment, with the daily volumes in the demat segment slipping from an average of Rs 10-15 crore to Rs 2-3 crore in the last fortnight.

The trend has also raised some questions on the success of the market regulator's decision to have only a rolling settlement in the demat segment but an account-period or weekly settlement in the case of the physical segment. Earlier, there was a choice in the demat segment for both forms of settlement which was subsequently changed to only rolling settlement only by Sebi. Most market participants feel that the decision to introduce rolling settlement in the demat segment was a little premature. They say the regulator should have waited for a substantiveshift to the electronic form of trading before implementing a rolling settlement mechanism.

Interestingly, the drop in trading comes at a time when the depository is witnessing a surge in the number of shares coming in for dematerialisation.

The trend has virtually rocked the contention of the regulator that post-April 6, volumes in the demat segment would spurt. That has failed to happen. Instead, shares are being speedily dematerialised and delivered in the physical segment.

Over a period of time this trend may well see the physical segment shrink as more and more shares are delivered in the demat form. But that is likely to take some time. In the meantime, however, the turnover in the demat segment has been reduced to an academic value of about Rs 2 crore against securities worth Rs 29,000 crore having been dematerialised. "At this rate the day is not far when the demat segment would need to be scrapped altogether as it is hardly witnessing any volumes. All the demat shares owned by investors seem tobe delivered in the physical segment," said a source.

A Sebi official, when contacted, said that the fall in the volumes was expected now that the focus has shifted to the physical segment. He, however, remained non-committal on whether the rolling settlement move had failed. "We need to give the market some more time. We will come out with some more steps to boost trading in the demat segment," said the official.

Brokers who deal in demat shares, however, say that the mandatory rolling settlement has proved to be an obstacle. "An investor is really not bringing in fresh money. All he is doing is shifting his portfolio from physical to demat. But in the case of the demat segment, he has to make the payment or give the delivery almost immediately. As the settlement period is much longer in the physical segment he finds it difficult to perform this switching option," said a broker who is also a depository participant.

A rolling settlement has also kept the speculators away as it makes it difficult forthem to square off their positions on a daily basis.

"Logically, there is no reason why an investor would not prefer a rolling settlement mechanism as he gets his money as well as shares much faster. But concerns have been expressed over whether it was correct to shift the demat segment to only rolling settlement when the segment was still to catch up," said a market source.

Market sources said that the expansion of the compulsory demat list may have little impact on the volumes in this segment, as institutions seem to be quite comfortable delivering shares in the physical segment.