The dematerialization drive initiated by the NSDL has turned out to be a great success. Can you give us some figures to put this in perspective and also how NSDL has been successful in changing the mindset of investors?
Mr. Bhave: We are hesitant in declaring success right now. We still have a long way to go. During the first six months, everyone thought we had failed, but now it is apparent that that was not the case. Therefore, I do not believe in labeling the process a success/failure as yet. The task initially looked too big to attempt. The lesson we have learnt is that no matter how big the problem, one should atleast commence nibbling at it.
In terms of numbers, stocks representing 50% of the market capitalisation have been dematerialised. The purpose of dematerialization is to smoothen the settlement process. In this context, 90% of settlements in India are now in demat form. These figures may also imply that some long-term investors and some promoters who do not trade in their stock have probably opted to stay out of this process atleast for the time being.
One thousand corporates have signed up with NSDL for dematerialization of stocks. Of these, SEBI has mandated 500 for compulsory trading in demat form. We have over 2.5 m investor accounts. It is difficult to estimate the number of investors owning shares. We have 40 m folios in the 1,000 companies. But there is double counting. Investors have multiple folio numbers in the same company. Moreover, one investor having a number of stocks will have a separate folio number for each of the stocks. In the depository he will need only one account.
The fear that investors may not want to part with certificates (at the time of introducing this concept) was far easier to remove than anticipated. This was largely due to our underestimation of the problems being faced in the physical delivery based market. Moreover we were able to convince people that the system worked and the benefits were as promised.
EQM: What are the targets for adding more listed companies into the dematerialization process?
Mr. Bhave: We are targeting that 100% of the settlements be done in dematerialised form. Initially we covered companies that were a part of the popular market indices. Now, Sebi is initiating a process by which all stocks traded in different exchanges would go demat. This would be done in stages.
Infact, at the time of initiation of the process, NSDL, had suggested that Sebi provide a window in the markets for physical trading of stocks (which were permitted to be traded only in demat form). This was accepted. The markets are currently offering to buy physical stock at prices that are at a discount of sometimes upto 20% of price offered for the corresponding demat stock. This in itself has created incentive to go in for dematerialization of stock.
EQM: India has adopted a multiple depository structure - with the NSDL and the CSDL. What are the pros and cons of this approach?
Mr. Bhave: Markets were of the opinion that implementing two depositories would be a complicated thing. However, the process is not all that complicated. NSDL and CDSL have an electronic connectivity between themselves. Customers stand to benefit from this structure, as they would have a choice of a depository in terms of service and costs.
Internationally, the trend is towards a single depository set up. Infact in Europe a debate has already started on the prospects of a Trans-European depository and the need for a depository in each individual country is being questioned.
EQM: What is the perception of foreign investors towards the process of dematerialization?
Mr. Bhave: Foreign investors have been very positive about the entire process. Infact, almost 95% of the trades entered into by foreign investors are settled in demat stocks.
EQM: With the advent of e-broking what is the larger role you envisage for NSDL as a facilitator for this investor service? What are the steps that NSDL will be taking to maximise customer satisfaction in this regard?
Mr. Bhave: E-broking will not affect us directly, as we do not come into the picture during trading. We are involved in the transfer process. In e-broking services, where verification is required, it is the depository participant that will come into the picture. Thus the three way relationship will be between the client, e-broker and depository participant. The advent of e-broking will however mean that we should have the capacity to process more transactions as far as settlements are concerned.
EQM: Stock lending has yet to take off in a big way. What are the impediments in this process and what steps have been initiated to get overcome them? Could you throw some light on these issues?
Mr. Bhave: Stock lending, derivatives and rolling settlement are the three legs of the same stool. Stock lending has started in a very small way. Institutional brokers are already making good settlement shortages by borrowing stock.
The stock lending facility has also taken off in the automatic lending and borrowing module of the NSE. This facility was dormant for six months until the market finally realised its utility. This service now clocks a turnover of Rs.4 to Rs.6 bn per week.
EQM: Can you shed some light on the cost structure of a demat account in India vis-a-vis for a developed market like US.
Mr. Bhave: World over depositories do not maintain individual accounts. Infact they maintain only the accounts of the depository participants. The central depository effectively processes entries only for net positions of various depository participants. Therefore cost structures are not comparable.
EQM: In light of rolling settlements being introduced in a number of stocks, what are the implications for the volume of settlement transactions through NSDL on daily basis?
Mr. Bhave: This is still not an issue for NSDL largely due to the fact that stocks which have been shifted to the compulsory demat mode are not the most actively traded stocks. However, when actively traded stocks go into rolling we will have to observe the effects. We have the extra capacity that may be required as also the commitment to enhance capacity if the need arises.
EQM: Please give your views on permitting the introduction of electronic means to send instructions to depository participants? For example, currently a seller has to notify his DP by filling in a physical form, else there would be default in the delivery process. An electronic process would make the process much more convenient and secure.
Mr. Bhave: There are two issues here - legal and safety. The legal issue concerns pertain to whether an electronic signature would serve as sufficient evidence and would it be enforceable in a court of law. The safety aspect is from the point of view of the customers who may have inhibitions about this method. I am definitely in favour of the process. To give you one example, the need for setting up multiple set ups in different areas would be eliminated for a depository participant. Customers could send orders via the net, and maybe even open a demat account on the web itself.
EQM: Is there any issue you would like to mention which may not have been covered by us.
Mr. Bhave: The dematerialization process has been so far limited to equities. Now the debt side needs to be covered. The debt markets have been plagued by settlement problems. We are aiming to replicate a similar process on the debt side now. The Finance Bill for FY2001 has given a boost to our plans by making the adequate amendments to the Stamp Duty Act.
EQM: Who are the people that have influenced you the most?
Mr. Bhave: Mahatma Gandhi and Abraham Lincoln.
EQM: What are your favourite books?
Mr. Bhave: I read almost anything I can lay my hands on. One book that I have recently read and would want to mention is 'Built to Last'.