Before the reforms, all positions on a stock exchange were settled on a weekly or fortnightly settlement cycle, on specified dates. What did settlement on specified dates give rise to?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Speculation and sudden changes in share prices
Option (1) Speculation and sudden changes in share prices — Correct. Under the old cycle, trades were settled only on specified dates. This gave rise to speculation, and share prices rose and fell suddenly due to trading and defaults by brokers.
Option (2) Transfer delays and forged transfers of share certificates — Incorrect. Theft, forged transfers and transfer delays came from share certificates held in physical form. The electronic book entry form was meant to remove them.
Option (3) A fall in the volume of trading on the exchange — Incorrect. The weekly or fortnightly cycle increased the volume of trading on the exchange. This is one reason it lasted so long.
Option (4) A shortage of liquidity in the system — Incorrect. The old cycle provided liquidity to the system, so it caused no shortage.
NCERT (Pre-rationalised Edition): “Steps in the Trading and Settlement Procedure … Prior to the reforms, securities were bought and sold, i.e., traded and all positions in the stock exchange were settled on a weekly/fortnightly settlement cycle whether it was delivery of securities or payment of cash. This system prevailed for a long time as it increased the volume of trading on the exchange and provided liquidity to the system. However, since trades were to be settled on specified dates, this gave rise to speculation and price of shares used to rise and fall suddenly due to trading and defaults by brokers. …” “Dematerialisation and Depositories All trading in securities is now done through computer terminals. Since all systems are computerised, buying and selling of securities are settled through an electronic book entry form. This is mainly done to eliminate problems like theft, fake/forged transfers, transfer delays and paperwork associated with share certificates or debentures held in physical form. …” |