Are Indian markets safe?

By KennethPP 

Are Indian markets safe?

Is Dalal Street safe for investors?

Yes. Indian stock exchanges are now relatively safer when compared to other markets across the world. After several scams and systemic issues, the regulator Securities and Exchange Board of India (SEBI) and stock exchanges have fine-tuned the norms and put in place a risk management system that can withstand extreme shocks. Of course, prices can fall and rise and global chaos can influence stock movements, but Indian markets are in a position to tackle them. There were no payment problems or crisis here when global markets crashed last year in the aftermath of the Lehman crisis. Though the European debt crisis is giving anxious moments to investors with the Sensex (^BSESN : 16519.68 0) dancing to the tune of global developments, Dalal Street has no reason to worry.

Why are our markets a safe place?

First, there are proper norms for various market intermediaries from brokers to depositories. Indian exchanges have developed an established system of margins and there is a circuit breaker system to tackle huge swings in stock indices. Short selling norms are stricter and the payment and clearing system works like a well-oiled machine. Brokers are required to follow capital adequacy norms as well. Result: Indian markets have not heard of any payment crisis in the last five years.

How does the margining system work on Indian exchanges?

The aim of collecting margin money from the client or broker is to minimise the risk of settlement default by either counter-party. The payment of margin ensures that the risk is limited to the previous day's price movement on each outstanding position. Margin money is like a security deposit or insurance against a possible future loss of value. Once the transaction is successfully settled, the margin money held by the exchange is released or adjusted against the settlement liability. There are different types of margins like initial margin, mark-to-market, exposure margin and additional margin. The liquid assets deposited by the broker with the exchange should be sufficient to cover upfront variation margins, extreme loss margin and mark-to-market. The mark-to-market margin would be payable before the start of the next day's trading. The margin would be calculated based on gross open position of the member. The gross open position for this purpose would mean the gross of all net positions across all the clients of a member including his proprietary position. The exchanges would monitor the position of the brokers' online real time basis and there would be automatic deactivation of terminal on any shortfall of margin. Both the Bombay Stock Exchange and the National Stock Exchange (^NSEI : 4947.6 +27.95) have been religiously collecting the margin from clients/ brokers. The exchanges have the flexibility of increasing and decreasing the margins or even imposing new ones if the situation warrants.

What's the role of a circuit-breaker system?

Sebi introduced the circuit-breaker system in 2001. These circuit breakers apply if either the Sensex or Nifty move up or down by 10 per cent (one-hour halt), 15 per cent (two-hour halt) and 20 per cent (suspension for rest of the day) during the day. The circuit breaker brings about a coordinated halt in trading in all equity and derivative markets nationwide from with the intention to cool down the market and give sufficient time to investors in order to take balanced and informed decisions. Besides, there's stock-specific upper/downward limit on stock prices that range from 5-20 per cent.

Can short-selling create problems in Indian markets?

SEBI allowed short selling by all types of investors in 2007. In order to provide a mechanism for borrowing of securities to enable settlement of securities sold short, Sebi has put in place a full-fledged securities lending and borrowing (SLB) scheme for all market participants. India doesn't allow naked short selling. This means if you are short-selling, you need to borrow shares and do it. Investors need the back-up of borrowed securities to execute short sales and they can't keep short-sale position open.

What's the role of Investor Protection Fund?

Investor Protection Fund is set up by the stock exchanges to meet the legitimate investment claims of the clients of the defaulting members that are not of speculative nature. Stock exchanges have been permitted to fix suitable compensation limits, in consultation with the IPF/CPF Trust. It has been provided that the amount of compensation available against a single claim of an investor arising out of default by a member broker of a stock exchange should not be less than Rs 1 lakh in the case of major stock exchanges.

Source :http://in.biz.yahoo.com/100520/50/bavmrn.