MUMBAI, Dec 10: The National Stock Exchange (NSE) should seek a limited purpose bank status for its clearing corporation to bring about greater settlement efficiency, said S H Khan, chairman of the Industrial Development Bank of India (IDBI).

Khan, who is also the chairman of NSE, said that the only missing piece in the settlement system was the lack of a nation-wide electronic funds transfer system without which settlement efficiency or delivery versus payment in its true sense can simply not be achieved.

Speaking at a workshop on risk management organised by NSE, he said that the members and investors operating on NSE are spread all over the country and settlements are conducted on a strict time bound schedule. "As the clearing corporation is not a banking company, it has to use the services of commercial banks for the purpose of pay-in, pay-out and movement of funds,'' he said.

Due to the size of the operations and the funds involved, the clearing corporation uses multiple clearing banks for the purpose. In this connection, the international practice has been to grant a limited purpose bank status to clearing institutions that handle securities and funds so that the settlement can be effected without any external intervention.

"This yields greater settlement efficiencies and is perhaps an ideal scenario. This need will be felt more when trading in derivatives commences and a common settlement mechanism is set up for settlement of debt market trades," Khan said.

"The NSE should move the Reserve Bank of India for geting such a status for its clearing corporation," he added.

Khan said that the future course of action should be to move closer to a delivery versus payment environment, which will benefit small and large investors alike.

Richard Evans, managing director of Euroclear, a global clearing and settling agency, said that portfolio managers need to take two important aspects into account when managing funds. ``Firstly they should keep a diversified portfolio. You should never keep all your eggs in one basket," he said."Secondly, it is imperative for portfolio managers to be transparent about the risks involved and the risk management systems that they have put in place. They must explain to their clients about the risks prevalent in the market, what are the risks and who is the one who runs the risk," Evans said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.