The Wall Street Journal-20080206-Checks and Imbalances in India- Volatility Gets Intensified by Old Means of Settling Trades
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Checks and Imbalances in India; Volatility Gets Intensified by Old Means of Settling Trades
Full Text (1009 words)Bangalore, India -- A surprisingly old-fashioned practice has emerged as a key factor in the Indian stock market's exceptional volatility: the dependence on paper checks to settle trades and meet margin calls.
Many individual Indian investors have to hand deliver or mail checks to brokerages to buy stock listed in India, while in other markets -- emerging and developed -- people enjoy the speed of electronic fund transfers.
Nearly 80% of retail stock-market trade in India is settled through checks. Checks take about two days to clear if the banks are in the same city and longer if they aren't.
The result is a relatively thin layer of small investors playing the stock market.
Given India's traffic snarls and the vagaries of the postal system, it is proving difficult for the average investor to benefit from the stock market's troughs. When share prices are plummeting, brokers can't get in and buy on behalf of customers until they show up with their checks.
Deven Choksey, managing director of K.R. Choksey Securities in Mumbai, described a recent volatile day this way, "Some of those who wanted to buy, couldn't." Other brokers, handling trading on margin accounts, "had to resort to selling the clients' stocks on hand, triggering margin pressures and the crash."
That is because brokers have to settle derivatives accounts with the exchanges the next day, a deadline that is hard to meet on volatile days. Ordinary stock trades have to be settled within two days.
Retail investors make up just about 2% of the trading volume in the Indian markets. About 4% to 5% of household savings is invested in stocks, compared with more than 50% in the U.S., and between 20% and 40% in markets such as Singapore, Hong Kong, South Korea and Japan, said Nilesh Shah, Icici Prudential Asset Management Co.'s deputy managing director.
Although online trading was introduced in 1995, most Indians still trade through brokerage firms.
Brokers and retail investors want one of two measures to remedy the situation: an increase in the settlement time with the exchanges to three or four days from one to two days now, or an electronic system permitting the immediate transfer of funds.
"The banking system should . . . keep step with the stock market," Mr. Choksey said. For instance, many retail investors can't pay brokers electronically because banks' branches aren't linked electronically.
In the case of futures and options, or the derivatives market, which tends to be more volatile because it is more leveraged, as much as 95% of trade in India is done through checks, Mr. Choksey said.
The Reserve Bank of India, which regulates banks, introduced a real- time system of payments for banks in March 2004. But it is too expensive for some individual investors and is used mainly by domestic institutions. The system is used to settle amounts of more than 100,000 rupees, or about $2,500, said Alpana Killawala, a central-bank spokeswoman.
Making matters worse, banks in India missed a March 2007 deadline for complying with Basel II norms, which included an overhaul of information-technology systems, including those supporting electronic funds transfer. The new deadline is next month for banks with overseas branches and March 2009 for the rest.
Meanwhile, stock-market volatility is on the rise.
On Jan. 22, India's Sensex index fell by the maximum 10% limit allowed and trading was halted for an hour. It was the second such halt in a little over three months and the fourth since 2004.
On Jan. 21 and Jan. 22, the Sensex slumped a total of 12%, or more than 2,200 points over those two days, far more than the indexes of countries more vulnerable to a U.S. downturn.
European Stocks Sink
On Bleak U.S. Data
European investors wiped out all of February's early gains after some dismal data on the U.S. economy dealt another blow to fragile investor sentiment.
Auto makers Renault and Porsche Automobil Holding and German printing-press manufacturer Heidelberger Druckmaschinen were among those that fell on fears that the U.S. consumer's wallet is shrinking. Financial stocks also posted big declines.
In Asia, shares in Shanghai and Hong Kong declined as investors locked in profits before the Lunar New Year holidays. Japanese stocks were hit by a number of profit warnings.
Australia's S&P/ASX 200 index fell after the country's central bank raised its benchmark interest rates by a quarter percentage point to 7%, the highest level in more than 11 years.
The pan-European Dow Jones Stoxx 600 index skidded 10.40 points, or 3.2%, to 318.73, its largest one-day point and percentage decline since Jan. 21. The index has fallen 12.6% this year.
The losses accelerated as data showed that growth in the nonmanufacturing side of the U.S. economy contracted sharply in January. The Institute for Supply Management's index hit its lowest level since October 2001, driving down both U.S. stocks and yields on U.S. Treasurys.
"If this survey is telling us anything, it is that current spending by U.S. households has weakened substantially," said Rob Carnell, an economist at ING. That means there will be less demand for products from Europe, he added.
In LONDON, the FTSE 100 index shed 2.6% to 5868.00. Copper prices fell on the back of the weak U.S. data, pulling miners lower. Anglo American shed 3.9% and BHP Billiton fell 3.2%.
In PARIS, the French CAC 40 tumbled 4% to 4776.86, its largest one- day point and percentage decline since Jan. 23. Renault skidded 7.4%.
In FRANKFURT, the DAX lost 3.4% to 6765.25. Heidelberger Druck plummeted 16% after it cut its outlook for the current fiscal year.
In HONG KONG, the Hang Seng index lost 0.9% to 24808.70 and the Hang Seng China Enterprises index gave back 0.6% to 14040.68. Jiangxi Copper dropped 2.8% and Hunan Nonferrous Metals shed 2.5% after both warned that production has been affected by power shortages and transport delays due to winter storms in China.
In TOKYO, the Nikkei Stock Average of 225 companies slipped 0.8% to 13745.50.
In SYDNEY, the S&P/ASX 200 index lost 1.3% to 5792.90 following the interest-rate move.
