Much of collateral placed by investors is locked in opaque systems controlled by brokers, custodians and banks, Securities and Exchange Board of India’s (Sebi) Whole Time Member Ananth Narayan G said on Thursday, highlighting the inefficiencies within the system.
Speaking at the India Fintech Forum 2024 in Mumbai, Narayan said that much of the collateral placed by investors—currently at ₹4.5 trillion—is locked in opaque systems. This float, he argued, contributed to hidden revenues for intermediaries while exacerbating inefficiencies and risks.
A collateral amount is a sort of loan against shares extended by a broker to its clients for trading in stocks. Like a bank, the broker charges an interest on the collateral amount it provides.
“That ₹4.5 trillion of average balance lying around (almost like a mid-sized bank by itself) obviously represents an inefficiency in that the brokers benefit, the custodians benefit in form of a non-transparent earning that they get from that float. The reason why you have zero brokerage is not because the broker likes your face, it is because they are making money off this float lying in the ecosystem,” he said.
The official also mentioned how Sebi’s move towards a T+0 settlement system, to enable instantaneous transactions, was aimed to reduce such inefficiencies.
The Indian market’s journey 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 settlements, is a testament to the resilience and adaptability of the ecosystem, he said.
He also said that intermediaries, despite a shrinking share of revenue from brokerage fees, were benefiting from the increasing size of the market. The intermediaries have never had it so good. They are making a lot of money quickly. “The size of the pie has grown so much, that even though your share of that pie has dwindled to very small numbers, you are still getting a lot more than what you got 30 years ago”, he noted.
A significant part of Sebi’s future strategy includes leveraging India’s payment systems, particularly UPI, Narayan said. He spoke about plans to enable investors to buy securities simply by blocking funds in their bank accounts. This feature, already available for primary market applications through ASBA (application supported by blocked amount), is expected to enhance liquidity and ease of transactions in the secondary market as well. While the volumes in this system are currently low, Narayan expressed confidence that the adoption of these new technologies would 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 fast-evolving ecosystem, acknowledging that while regulations are essential to prevent risks, they should not stifle innovation. He mentioned how the regulator was aware of the types of errors within the system; type 1 error being when a risk event occurs, such as a scam, and type 2 error being where overregulation stifles legitimate business. “I just want to assure the crowd that we are conscious of both errors and that we have to minimize both errors”, he concluded.
