It was summer of the year 1997. The equity markets in India were struggling to come out of a four year long directionless phase. Though globally the technology sector had started to excite the investors, nothing much was happening in India. It was arguably the most dreary phase in the Indian stock markets in a decade.
The National Stock Exchange used to follow a weekly settlement system in those days. Under the weekly settlement system, trades done during a week beginning every Wednesday and ending on the subsequent Tuesday were clubbed together and the net result of those trades was settled in the next three days. The net funds due were paid to the clearing corporation on Wednesday. The net sold securities were delivered on Thursday. The new fund receivable and net securities purchased were received on Friday. All deliveries were in physical paper form.
A weekly settlement cycle ended on Tuesday, the 20th of May 1997. The pay-in of funds due was made on Wednesday, the 21st of May. The securities were delivered on Thursday 22nd May. Everything went smoothly till 3PM, when the Bombay High Court appointed a provisional liquidator for the CRB Group, one of the prominent financial services groups at that time, which was facing problems for the past few months.
Anticipating this order, the CRB Group entities had sold a huge quantity of securities in that settlement cycle. Most notably, they had sold their entire stake in Bank of Punjab (about 5%) in that settlement. The buyers who had bought the securities sold by CRB Group had already paid in the funds on 21st May. CRB Group had delivered the securities on 22nd May. The provisional liquidator approached the Clearing Corporation and stock brokers and told them to hand over all share certificates delivered by CRB Group and all funds due to be paid to CRB Group. The case took about 15yrs to settle. The investors who had paid money on 21st May 1997, received shares only in 2012-13. Luckily for them, the Bank of Punjab (BoP) was taken over by HDFC Bank in the meantime and they received HDFC Bank shares in lieu of their BoP holding.
After this incidence, two things happened in the Indian stock markets –
(a) The process of Dematerialization of securities was implemented at an accelerated pace. India actually became the first country to achieve 100% demat settlement within 3years. Incidentally India was also the first country to implement 100% screen based electronic trading of securities.
(b) The weekly settlement cycles were replaced by daily settlement cycles with a T+2 settlement schedule. Under the new system, the trades done on a particular day were settled on the third working day with simultaneous pay in of funds and securities. Though technically there was still a gap of 2hrs between pay in and pay out, the risk had substantially diminished.
A large number of young market participants who are still in their 20s may not fully appreciate how much the electronic trading and demat settlement of securities means for the Indian markets. My research in 2003-2005 had indicated that over 95% of the market participants regarded dematerialization of securities as the single most important capital market reform in India.
From the next week onward, Indian stock exchanges will move to T+1 settlement schedule for all the trades executed on the exchanges. This implies further mitigation of settlement risk and faster settlement of funds and securities. India will be the second market, after China, to implement T+1 settlement of securities’ trades. The US and Canada regulators had also passed a resolution to implement T+1 settlement last year.
T+1 settlement is a big leap towards achievement of real time gross settlement (RTGS) of securities in next few years.
Another point that is worth noting in this context is that Indians have shown remarkable capabilities and enthusiasm in adoption of technology in the past three decades. Quick and widespread adoption of electronic screen based trading, dematerialized settlement, mobile telephony, digital payments, and digital communication (e.g., healthcare, education, business and personal meetings during pandemic) are only some of the example, how even the less educated and digital illiterates have adopted the technology in their day to day life.
If a politician or policymaker cites low education level or digital illiteracy as a reason for not initiating or implementing any reform, you should know that he is either unaware of the ground realities or is making blatantly false excuses.
