Highlighting the inefficiencies within the system, Securities and Exchange Board of India (SEBI) whole-time member Ananth Narayan Ji on Thursday said most of the collateral held by investors is locked in opaque systems controlled by brokers, custodians and banks.
Speaking at the India Fintech Forum 2024 in Mumbai, Narayan said that most of the collateral held by investors – currently 4.5 trillion – locked in opaque systems. He argued that this float contributed to hidden revenues for intermediaries while increasing inefficiencies and risks.
Collateral amount is a type of loan against shares which is given by the broker to its clients to trade in stocks. Like a bank, the broker charges interest on the collateral amount provided.
“He The average balance of Rs 4.5 trillion lying around (almost like a medium-sized bank in itself) clearly represents an inefficiency in which brokers benefit, custodians benefit in the form of non-transparent earnings. is what they get from that float. The reason you have zero brokerage is not because the broker likes your face, but because they are making money from this float lying in the ecosystem,” he said.
The official also noted that SEBI’s move towards T+0 settlement system to enable instant transactions was aimed at reducing such inefficiencies.
The journey of the Indian market from the opaque and inefficient systems of the 80s and 90s, where equity settlement could take up to 15 days, to today’s T+1 settlement, is a testament to the resilience and adaptability of the ecosystem, he said. Is.
He also said that despite the declining share of revenue from brokerage fees, intermediaries are benefiting from the growing market size. Middlemen have never had it so good. They are making a lot of money fast. “The size of the pie has grown so much that even though your share of that pie has shrunk to a very small size, you’re still getting a lot more than you did 30 years ago,” he said.
An important part of SEBI’s future strategy includes leveraging India’s payments systems, especially UPI, Narayan said. He talked about a plan to enable investors to buy securities by holding funds in their bank accounts. This feature, already available for primary market applications through ASBA (Applications Backed by Blocked Amount), is expected to increase liquidity and ease of transactions in the secondary market as well. Although volumes in this system are currently low, Narayan expressed confidence that adoption of these new technologies will increase over time, much like the initial slow uptake of demat accounts and ASBA in the past.
Narayan also addressed the challenges of regulating this rapidly evolving ecosystem, acknowledging that regulations are necessary to prevent risks, but they should not stifle innovation. He noted how the regulator was aware of the types of errors within the system; Type 1 error occurs when a risk event occurs, such as a scam, and Type 2 error is where overregulation prevents legitimate business. “I just want to reassure the crowd that we are both conscious of the errors and we have to minimize both errors”, he concluded.
