Sharing an interview from exactly 13 years ago. I had interviewed C.B.Bhave when he was heading NSDL. He served in NSDL for about a decade. After NSDL, he was the SEBI chief for around 3 years.
I was working in Outlook Money magazine at that time.
The interview:
"Before
NSE and NSDL were built people could not believe that large
automated systems with nationwide applicability are a feasibility in this
country"
July
2004
It was a momentous
decision, both for him as well as for the stock market, when in July
1996 C B Bhave quit a heady post as a senior executive director in
charge of the secondary market department at the Securities and Exchange
Board of India (Sebi). He was asked--and he agreed to--take over the reins
of the newly-formed National Securities Depository Ltd (NSDL) as
its managing director. NSDL had the mandate to introduce the depository
system in the country's capital market. It went live in November 1996.
A civil service officer
since 1975, Bhave worked in the central government and state government of
Maharashtra before joining Sebi when it was set up in 1992. Very few
securities market professionals in the country have as much intricate
understanding of the capital market as Bhave does.
In the eight years he has
been in NSDL, the benefits of depository have reached investors in no
small measure. Bhave has been there all along. He wants to sustain the
stock market role of the depository but also wants to make the depository
be of use for purposes other than that of stock market. Read on how in an interview
with Bhave.
Five years since depository
began and investors feel that costs which should have come down has in
fact gone up.
We don't charge any annual
fees to the DPs. How much a DP charges the investors is something over
which we have no control. We enable more and more DPs so that there is
competion... But even there we found that there is a range of fees, some
charge high annual maintenance charge (AMC) and some charge as low as Rs
100. We haven't investors change their DPs.... Somehow, we have not seen
costs as a determining factor in where the investor will decide to go. We
have seen DPs having offices side by side, one is advertising that that
his charges are lower but still no movement from the other to him. It is
also an issue of which DP the investor will prefer from the point of view
of his comfort and what kind of services he wants.
Is it because the investor
feels that the charges are high across the spectrum and so does not feel
motivated enough to check out all?
There is quite a variation
if you look at the charge structure of DPs as communicated to us. It is up
on our website www.nsdl.co.in. It is possible for investors to go there
and compare the charges across DPs.
I don't think one can do
anything about this it except to see that competition is there and to
check out from the charge structure whether is there is any sign of
cartelisation. I haven't seen any sign of cartelisation. There is
tremendous variation in the charge structure across DPs.
Charges vary only above the
bare minimum you charge. For instance, you charge a transaction fee of Rs
8 only per debit whereas DPs charge investors anywhere between Rs 8 and Rs
25 and some of them even charge these for credits. Are you not concerned
about these anomalies?
Some DPs are even charging
transaction fee on the value of the transaction. So there is tremendous
variety. There are two ways of looking at it. One, we say is that there is
actual variety. But I don't see a role for NSDL to fix charges of DPs to
investors because that is a policy we have kept away from. Even in law we
don't have that kind of power.
There are DPs who do not
charge on the credit side, then that does not seem to drive the investors
to open demat accounts with them. The DP charging more seems to have his
business flourishing as much as the DP who is charging less. In any
consumer it is a legitimate aspiration to get that service at a lesser
price than what it is today. But whether that price alone is a determinant
in deciding whether to avail of service from X or Y or Z there doesn't
seem to be strong evidence linking the price to his decision.
In a sense, price variation
is very demonstrative of the fact that competition is really at work.
Otherwise, you would have seen uniform prices and that would be somewhat
like cartelisation.
Investors in metros have
access to multiple DPs. But that is not the case in small cities or towns
where you have just one or two DPs.
It is a valid point that the
choice that one has in places like Mumbai or Delhi one will not have in
other places. But we should equally consider the other fact that no DP is
saying that my charge in Mumbai will be so much but in Ahmedabad it will
be so much. Their charges are uniform across the country. So whatever the
intense competition in Mumbai or Delhi drives them to charge is something
that is being charged across. If there is only one DP and he is
over-charging in a centre some other DP which can conduct operations at a
lower cost will see that opportunity and will probably try to get there
and take the investors away. So maybe those places don't have so much
volumes which is why they are not generating enough competition among DPs.
What we typically do as an
exercise every six months is that from the addresses of investors we do a
district-wise analysis of how many demat accounts are there in a
particular district and feed this information onto DPs so that if a DP
feels that, lets say he is also a broker and on his trading terminal a lot
of orders are coming from this particular district but the demat accounts
are very few in that district he could sense a business opportunity and go
there. We try to make this kind of information available to people.
But the feeling persists in
many investors that competition has not had an impact as far as costs are
concerned. They do not think variation in prices is there. Do we have to
look at competition as the main issue, do we have to leave it totally to
competition. Is that the best approach?
Prices to be determined by
competition is one of the things. We must be alert all the time to any
monopoly that may be developing or if there is no monopoly situation and
there are indeed many players whether there is any cartelisation taking
place. If all DPs are agree to one price and says that we will not go
below this and get all consumers to pay this price. That is the second
aspect of competion. Whether the players who are supposed to compete with
each other are eliminating the competition by forming some kind of a
cartel. I think the third thing one has to look at is what kind of signals
we are getting from investors in terms of investors joining that system on
a consistent basis and wanting to remain in the system. All these factors
will combine to tell us the story in any given situation.
So if there is cartelisation
and if there is stagnancy in growth of investor accounts you will notice?
We will notice and we will
be worried as business people. We will try to find out whether DPs are
doing something wrong or what is it.
In terms of numbers, what is
the intensity of investor complaints you receive?
About 70-80 per cent of the
complaints that we receive are relating to delay in dematerialisation.
That is one area where we don't have a proper legal or regulatory force
because the depository can do nothing to the registrar or the issuer. We
don't have a jurisdiction over them. Even Sebi's ability to take them to
civil courts and get some decisions against them is bogged by the fact
that our court process are so slow. But we adopt other means like put up a
list of top 200 issuers on our website that are worst in terms of delay in
dematerialisation. We inform our DPs to tell the investors not to put for
dematerialisation their physical shares in these companies because they
will lose their physical shares and not get electronic credit. So, by this
way at least we keep the investors away from such delays. Since this also
involves the reputation of the companeis we think it might have an impact
on them.
But the good part of the
story is that if you take the top 500 BSE-NSE companies there are very
little complaints. The processing time for these companies is tip-top. The
complaints are all in the lower segment. That lower segment is huge in
terms of numbers.
Monetary fines is an option?
Not for the depository. We
don't have the jurisdiction. We have a jurisdiction with DPs since they do
business with us. But the issuers does not do any business with us.
You impose no charges on the
issuers?
Charges are there when the
issuers want to do a corporate action where they have come up with a
public, rights or bonus issue. Otherwise their relationship with me is
like a post office. When you want to post you pay the post office. The
post office can not take any action against you.
So, can you do something
against erring issuers when they approach you with the corporation action
request?
Actually, these are not the
companies which are coming out with corporate actions.
What about the other complaints?
We receive other kinds of
complaints also like transaction statement not received. In these cases we
use force. We tell the DPs you have to revert to the investor. Then there
are investor complaints of non-execution of debit instruction slips by DPs
even though he had submitted it on time and as a consequence of which his
shares got auctioned and he suffered a loss. In these matters, we carry
out an enquiry and if we determine that the DP was at fault then we make
the DP pay compensation to the investor.
At times, we find it
difficult to determine whether the investor is right or the DP is right.
In which case we send the cases for arbitration. We have a arbitration
mechanism and we have seen arbitrators give decision at times in favour of
investors and at times in favour of DPs.
Where the decision is adverse to the DP then the DP has to pay up. Where
it is adverse to the investor we can not do anything. His recourse then is
the court.
How many arbitration cases
have taken place?
Uptil now, about 50.
In a particular case more
than a year back, we had a large number of complaints coming up about one
particular DP. There we had to a slightly different kind of action. We
told the DP that these are the places from where the complaints have come
and we are going to visit that place, put up an advertisement in the local
papers and invite the investors and you will have to on the spot satisfy
me that you have resolved their complaints. We told the DP you send your
representative to these places, contact your investors and resolve their
complaints. Sometimes we have to resort to this type of action.
With DPs we can be fairly
stringent. Like a stock exchange can with its broker-members. But with
companies, like a stock exchange can only suspend or delist a company, we
can only suspend the ISIN of a company. But the investor suffers.
There have been a few fraud
cases where unauthorised debits have taken place through forged signatures
and shares vanish from investors' demat accounts. Mostly, it happens due
to DPs lack of diligence.
When such complaints come to
us we first see to it that the shares are restored to the investors
accounts. Over a period of time people have been discovering new ways of
committing a fraud. We are trying to plug them. There is no way of getting
one step ahead of the thief. There are three-four things we have done. One
is that the debit instruction slip book that investors get from DPs must
alone have a request for a new debit instruction slip book. If the
investor has lost this debit instruction slip book then the DPs must ask
the investor to produce a transaction statement so that no third party can
come and pick up the debit instruction book. Secondly, the DP has to
verify with the investor about the representative he has sent and if you
are not satisfied ask the investor to come personally.
Another thing we found that
people were first putting in an application for a change of address so
that the transaction statements does not go to that investor. Then put in
a fraudulent transfer. Now the fact that the debits have taken place will
go to the new address.
So we told the DPs that they
have to make the procedure very stringent. Unless they find complete proof
and have a audit trail in their office about who authorised the change of
address, you will not effect the change. A lot of people who have
transferable jobs were bitterly complaining about this. But we had to get
stringent.
Then we have an internal
system of randomly selecting a portion of investors and dispatching side
transaction statements to them. They can compare these with the statements
they receive from their DPs. The fact that the DPs know that statements
can go from us to anybody acts as a check on them.
We also carry inspections on
DPs offices once every six months and check for all kinds of
irregularities and the efficacy of their systems. We also require the DPs
to carry out internal audits and submit a report to us every quarter. The
things to cover in these audit reports are prescribed by us. We take these
audit reports during our inspection visits.
These are the precautions we
take but ultimately at the end of the day your account is your account and
you have to be vigilant and check their accounts. We have a internet-based
holding statement view facility which currently 35 DPs are subscribed to
and they offer it to their investors. In fact, a lot of other DPs are
already offering it directly on their own this facility through their
websites.
Can an investor who is not
sure of the authenticity of the transaction statements he receives
approach NSDL and verify his account?
Absolutely. To give one
instance. In the 2001 scam there was a rumour that one of the DPs was
involved in the scam and likely to go bust. Investors having demat
accounts with that DP were worried about their shares. Realising that this
was a genuine fear we send a transaction statement to all the investors of
that DP.
You can courier to us or
email us if you want a verification. We will generate a statement and send
it to the address of the investor in our system.
One of the safeguards for
investors is freezing the account. Can an investor freeze just some and
not all stocks in his account?
Yes. Not only that but
within a stock itself you can freeze a part holding. If you have 1000
shares of a stock and want to freeze only 500 shares you can do it.
You also offer
internet-based debit instruction facility to your DPs who offer it to
investors. Whats the progress? How safe is it?
When you offer the facility
for people to give a debit instruction to you electronically then you have
to worry about whether that instruction has indeed come from the person
who was supposed to give it. In the physical mode, we take care of this
worry by verifying the signature on the debit instruction slip. In the
electronic mode, this is not possible. One way we do it is through a smart
card, its PIN, and a smart card reader, which is akin to digitially
signing your instruction. But the costs for these we felt for ordinary
investors will be too high. For investors, we have a password-based
facility where the investor can transfer the shares to only one or two
specified settlement accounts of their broker and not to any other
investors' account. And the broker has to give us an undertaking saying
that if by mistake I get shares from this client for which there is no
underlying transaction I will return it. Here, even if somebody steals
your password he will be able to transfer shares from your account only to
the pre-specified broker settlement account. He can't take it into his own
account.
This facility has had
limited success, like similarly in online trading and online banking. We
overestimated users' friendliness with the internet for carrying out
transactions. But we haven't abandoned the idea. We believe it will catch
on and when it catches on it will grow very fast.
We now have about 30 DPs who
have subscribed to this faciltiy. So, theoretically, all their clients can
use it. But not many are using it. The numbers are very modest. I think it
won't be more than 7,000 investors who are using it. These are fairly
transaction-intensive investors. In the last two years about 20 lakh debit
instructions have been executed through the internet. Its not bad in the
sense that 20 lakh pieces of physical debit instruction slips never
happened and no physical verification was done at the DPs offices.
We hope it will catch on.
Part of the impetus will be the short settlement cycles. Investors could
find it easy to electronically submit their debit instructions rather than
go to their DPs offices and hand it physically.
You moved from a value-based
charge structure to a fixed rate regime. Does this not subsidise
high-value investors at the cost of small-value investors who have to bear
a higher rate?
Its a fair question. Any
commercial entity has to relate its pricing to its cost. In the automated
environment of a depository, whether there is an entry for one share or
one lakh shares in a demat acocunt, the computer memory and the computer
processing power is the same. Again whether this one share is worth Rs
5,000 or worth five paise the system is neutral to it. Therefore, our
costs are driven by how many such entries investors need and how debit and
credit transactions take place. It is unrelated to the price of the
shares. If the market goes up by 25 per cent there is no reason for me to
charge 25 per cent extra because my system requirement is the same.
This is not something that is unusual. There are umpteen examples of
public service areas where this principle is followed. Take telephone for
example. If you make one call, whether you are Ratan Tata or an ordinary
man you pay the same thing because the telephone company says look my
costs relating to how big an exchange I put up is not related to who is
making this conversation and what is the content of the conversation. We
are in this kind of a paradigm. Commercially, it is a correct principle to
relate your pricing to cost. Otherwise, you could get hit. Let us assume,
in my system I have two crore demat positions and lets say I get two crore
transactions. Its possible to imagine a scenario where another 50 lakh
investors join me who create two crore demat positions which means I have
to double my capacity. The number of transactions, let say, doubles to
four crore. But the value of these additions could be one-hundredth of the
earlier positions and transactions. So though I double my capacity and
incur high costs I will get a revenue which is much less if I charge on
the value. I will be forced to increase the charge to the market because I
have to meet those costs. It will be ridiculous to explain to the market
that my business has doubled and I am increasing my charge.
But do not the risks
involved in a low-value transaction differ from high-value transactions?
Don't you have to compensate more when a DP's errors or fraudulent
transactions is of a higher value and results in a loss that could make
him go bust?
There is an insurance policy
on behalf of the DPs. The insurance policy premium that the DPs have to
pay depends on the value of the shares held and the value of the
transactions. So we do not apportion the same premium to DPs across the
board. The DPs who have higher value holdings and higher value of
transactions have to pay a higher premium.
What are the kind of premium
amounts being paid by DPs?
I can not disclose that. But
the variation is from one to ten. If some DPs are paying a particular
amount then some DPs are paying 10 times that amount.
Which insurance company is
this done through?
Uptil till two years, it was
the New India Assurance. Since then, it has been Ifco-Tokyo, one of the
private insurance companies that have been allowed in general insurance in
the country.
A question which is becoming important today is the issue of
remat option. Investors wanting to get rid of shares in companies that
have got delisted or disappeared can neither sell since these are illiquid
nor get it rematerialised (in order to tear off the certificates) due to
the non-existence or non-cooperation of the companies. As a result if he
wishes to close his demat account he is unable to do so and has to
continue bearing the charges.
Like in dematerialisation,
if the company delays or refuses to rematerialise we can not do much
because we do not have a hold on the companies. To the extent that these
companies are reputable ones they will be affected by the complaints
received against them and we putting up a list of names who are refusing
to rematerialise or delaying it.
For the untracable companies
I don't know whether there is any solution. The question is where will you
keep these shares and what will the liability of the legal entity who will
keep these shares. These shares have to be kept in some account and belong
to somebody.
Can NSDL make holdings in these dud shares charge-free?
We don't know if thats
possible. We will have to dynamically monitor and classify which shares
are dud and which are not.
The only way, currenlty, for
an investor who wishes to close his demat account but is unable to get rid
of dud shares is to transfer these shares to another person who is active
in holding demat shares.
Postal savings schemes�National Saving Certificates (NSCs) and
Kisan Vikas Patras (KVPs)�went demat recently. Whats up with it?
It was started as a pilot
scheme in certain post offices in Mumbai only. It has had a limited
success so far. About Rs 10 crore worth of NSCs and KVPs have been demated
so far. That is people have asked for demat instruments. There is no
demating of existing instruments. There is only future instruments you can
ask for when you buy. Our experience is that we have a little more than
2000 accounts into which these credits have gone. Of these 1000 were
existing demat accounts where there were already equity securities . For
people who do not have anything to do with the equity market and invest in
postal schemes we had to devise a separate scheme. The postal
department�s point was that these investors don�t pay anything when I
issue them a physical certificate, so there should no charge for them if
they have only NSC or KVP in demat account. For them a special demat
account is opened into which you can not put any equity shares or other
securities.
This has to be done through a DP?
You have to only give the
application to the post office. We do the work and send the investor his
statement. You can not use the account for anything else.
So the post office is defacto a DP?
It is not. The post
department has given the job to us. We have, in turn, outsourced it to one
of the registrars, Intime Share Registry,
This account has to be with a DP then?
No. It is a separate
account. No debits are allowed and credits are only in KVPs and NSCs. You
will have to wait and see what is the government's decision on expanding
this.
As in allowing existing demat accountholders to hold postal
schemes?
More than the existing
holders our point to them has been that we need to make it mandatory that
from certain post offices only demat will be available. This is the
segement of the market with which we are dealing which is not necessarily
aware of the demat facility. It will have its initial hesitation and so on
and so forth. If the government feels that it is in its interest to do it
then it can be considered. After all you are not changing anything.
Earlier, you were getting a certificate. Now you will get a statement of
account. He still gets a piece of paper. The convenience to him here is
that he doesn't have to preserve it for six years and produce it for
discharge. The records are electronic. If you lose your account statement
you can ask for a duplicate one.
Another suggestion we made
to them is that they can use our system which is keeping track of maturity
dates and automtically send the cheque to the investors a day or two in
advance of the maturity date. Today, you have to keep a track of the
maturity date. If you go 10 days or three months late its too bad. You
will not get interest for those days.
We have also made a
suggestion that as an alternate electronic credit of the redemption amount
can be made to the investors' bank accounts. All this is possible in the
depository system.
How many post offices offer this facility currently? Is the
number likely to go up?
We have it in about 35 post
offices in Mumbai at present. It is in the government's hands to increase
the number of post offices.
How has our markets developed? What would you like to tell
investors?
Five years ago, if you were
investing in equities in addition to being concerned with the price at
which you were buying or selling your shares you had to be worried about
the problems of delays in transfers and bad deliveries. Since then, what
has happened in an investor's life is that today when he invests he has to
only worry about the transaction cost and the price of the transaction.
Brokerage rates which were as high as 2.5 per cent in the physical
environment because of the threat of being stuck with bad deliveries. Now
he doesn't face that risk because of which the brokerage rates have
reduced substantially. This in turn benefits the investor.
But I would like to tell the
investors that do not ever assume that this system will make the world
fraud-proof. The systems are run by human beings and as long as there are
human beings in a chain of transactions there will be a tendency to do
things by going the wrong way rather than the straight path. And,
therefore the best guarding for your assets is you yourself. You have to
be vigilant. It is not to say that the system will not provide
satisfaction or have safeguards. But it will be foolhardy to rely only on
systems. It is always good to take your own precautions.
The impact of the depository
system has been two-fold. One is in the area of settlements where the
benefits are well-known. But I think the benefit has come from another
area too which is very important from society's point of view. Before NSE
and NSDL were built in this country people could not believe that large
automated systems with nationwide applicability are a feasibility in this
country. Now because these systems have been built and people see them as
successful in implementation they are beginning to question if you can do
it in this area then why not in other areas.
