The cash segment is possibly the most important part of equities market. However, SEBI and BSE are paying less attention to it
The Securities and Exchange Board of India (SEBI)’s recent directive for opening a separate trading window for the so-called ‘illiquid’ shares may reduce the liquidity of cash segment where the bulk of trading takes place, according to experts.
It is estimated that there are more than 2,100 so called 'illiquid' scrips trading on BSE as of December 2012. This number is likely to go up over 60% or over 3,000 scrips listed on BSE, once SEBI's directive is enforced from 1st April. Irony is some of these companies may even be good companies!
Nevertheless, this is not all. Exchanges, backed by the regulator, are simply gunning for more derivatives business rather than attracting retail investors and keeping the cash segment healthy and safe).
In a surprise move last year, SEBI issued a circular, permitting stock exchanges to boost liquidity in the derivative segment. “In consultation with BSE, MCX-SX, NSE and USE, it has been decided to permit Stock Exchanges to introduce one or more liquidity enhancement schemes (LES) to enhance liquidity of illiquid securities in their equity derivatives segments,” the circular said.
It is pertinent to note that volumes in the derivative segment have only grown to astounding heights since futures & options (F&O) segment was introduced to the market. Almost 80% of incremental volumes come from options and almost all of it happens in the National Stock Exchange.
To compete with NSE, BSE is currently running its 9th series of LEIPS or Liquidity Enhancement Incentive Programme, which focuses on SENSEX futures contracts (which indirectly has been linked to only Sensex stocks). The whole idea of this is to incentivise market makers (MMs) and general market participants (GMPs) like stock brokers and institutions to trade in the F&O segments comprising the index and bring in more revenue for the exchange.
The recent circular from SEBI stated, “The programme incentivizes both Market Makers (MMs) and General Market Participants (GMPs) by payment of cash for their participation as per prescribed terms and conditions.”
A look at the terms and conditions of the LEIPS XI programme, shows that market makers stand to gain Rs1,800, from BSE, for every Rs1 crore transacted in the futures market.
Market experts say that turnover for the derivative segment is meaningless without a robust cash segment.
BSE houses several thousands of micro- and small-cap companies that are present in the cash segment. While many of these companies are fraudulent or are “operator-driven” stocks, there are some genuine ones out there as well: family businesses and small-scale entrepreneurs who have tapped primary market to raise cash in the past. These companies would be stigmatised if moved to a separate window.
Earlier we had written a story about how SEBI's idea to shoo away equity investors in order to curb manipulation which is rampant. Click here for the story.
Inside story of the National Stock Exchange’s amazing success, leading to hubris, regulatory capture and algo scam
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The operated stocks are in fact less likely to end up in the "illiquid" list than genuine scrips, as operators will take care to adhere to the new norms (though they will certainly have to work much harder now).
One investor even opined that if Promoters want their scrips out of so-called "illiquid" stigma, they will now need the help of manipulators itself (to create artificial volume) !! And these rules are supposed to be to prevent manipulation ... sigh