Sebi should review market infrastructure institutions

The Indian capital market's regulatory regime has seen fast-paced reforms in areas of operational-risk management such as contract settlement cycles, public offer processes, and so on.

- G.N. BAJPAI

In several areas, the market has moved appreciably ahead of the expected curve of evolution, even if compared to capital markets in developed economies.

Capital-market risks have three frames: structural, systemic and operational. While the focus of reforms has been on minimizing operational risks and to some extent also systemic risks, the framework for market infrastructure institutions (MIIs) has not been transformed in tandem with either these changes or the market's growth, leaving the market exposed to structural risk.

In December 2024, NSC Clearing Ltd (NSCL) reported a shortfall of ₹176.65 crore in meeting required liquidity norms, which was explained as its non-receipt of ₹312.37 crore in dues from BSE, the stock exchange. This speaks volumes about risks that arise from weak financial links. To obviate settlement risk, the Indian stock market had shifted from delivery versus payment (DVP) to a central counterparty (CCP) system, transferring this risk burden from brokers to the clearing corporation. Centralized clearance guarantees the settlement of trades.

Recall that in 2001, the Ketan Parekh scam unfolded with a Kolkata Stock Exchange default in the settlement of trades worth about ₹120 crore. Brokers of the exchange failed to meet their obligations. Now, NSCL's inadequate liquidity endangers the CCP settlement guarantee.