The surge in the sensex in the past couple of weeks have recharged the market sentiments with the BSE sensitive index rising by 14 per cent to 4334 from 3808 in the beginning of June 1997.The question on everybody's mind is that will the rally continue or will it abate once the foreign institutional investors go slow on the purchases. While the rally is evident in select scrips, the fact of the matter is that it has failed to percolate to the other segments of the market, namely the B1 and B2 group.

The reason for such an apprehension is due to the fact that the turnover in the B1 and B2 groups scrips combined in June 1997 was a meagre Rs 60 crore per day. This is in sharp contrast to the B group daily turnover in 1994-95 of Rs 225 crore. In 1995-96 it fell to Rs 100 crore and to Rs 22 crore in 1996-97 in spite of the number of scrips listed increasing by leaps and bounds.To make the market vibrant, it is imperative that the small investors who have deserted the capital markets are brought back whose entry would resurrect the B1 and B2 groups.

The retail investors have shunned the market in the last two years on account of their investment in the primary market not fructifying. This has been largely due to free pricing of primary issues, where a host of companies pegged their offer price sharply higher than fundamentally justified price and in the process fleeced the investors. Those holding on to such investment can hardly realising 10 per cent of their value.Apart from this, gullible investors put their savings in fly by night companies. In many cases the companies are untraceable while others have hardly shown any results leading to sharp losses for this class of investors.

In May 1997, 2228 companies representing a paid up capital of Rs 25,289 crore were not even traded once.To instil vibrancy and liquidity in the market, market making in B1 and B2 groups of scrips along with transferring settlements of trades from one period to another should be allowed. The concept of market making in large number of these scrips which are at present illiquid would get a fair price quotation. This would allow small investors to shuffle their portfolio.The question is what facilities do we have for market makers in the present system. Bank finance is not readily available and if provided it is at exorbitant rates which acts as a deterrent. Therefore market makers cannot easily cover their position.

Hence it is essential that transfer of settlements should be permitted for market makers in case of short positions held by them. This would save the market makers of colossal losses which could arise due to compulsory auction presently followed.The system suggested at present is akin to renewals in B1 and B2 groups which was banned by Securities and Exchange Board of India in January 1995 on ideological grounds. The virtual on line surveillance system and prompt collection of margins have strengthened the renewal mechanism. Earlier, renewals were plagued by inordinate delays due to manual completion of settlement cycles. Presuming that the turnover in B1 and B2 groups rises to even Rs 10 crore, renewals would not be more than Rs 20 crore which can be sorted out in couple of hours under computerised trading and settlement system.Renewals along with the BSE move to expand on-line trading across the country will help provide the much needed liquidity in all the scrips.

A pre-requisite for the small investor to be attracted back.

The author is the president of the Bombay Stock Exchange

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.