Sebi gears up to tackle volatility - Views on News from Equitymaster

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Sebi gears up to tackle volatility

Feb 15, 2000

The Securities and Exchange Board of India (Sebi) has initiated several measures to curb volatility in the markets. The regulator had implemented the first round of measures last week when it ordered stock exchange authorities to impose ad hoc margins on leading 25 brokers. The new measures implemented by the Sebi include:

  • Institutional investors including foreign institutional investors, domestic financial institutions, mutual funds and banks brought within the ambit of margins
  • Daily margin of 5% on net outstanding positions of brokers in 10 select stocks (mentioned below)
  • 50% of additional capital and margins to be paid in cash (applicable by end of March)
  • Brokers will collect margins from clients where margins exceed Rs 100,000

The markets have witnessed a sharp rally since the beginning of this month (see graph) on the back of strong buying interest shown by foreign investors. Coupled with this, the surge in inflows into mutual funds has also contributed to the heightened buying interest in the markets. However, two things need to be looked at to justify the Sebi's move. First, there has been a sharp rise in volatility. To give an example, the BSE Sensex gyrated over 200 points in the last trading session alone. Second is the sharp rise in the net long positions to over Rs 40 bn. The second factor indicates that the involvement of momentum investors in the current bull run has increased dramatically.

The Sebi is taking precautionary measures to insure that the extent of leveraged buying is reduced in the markets. The move is definitely warranted and needs to be implemented forcefully.

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