Consider the following statements about settlement of trades:
(A) Under the earlier weekly or fortnightly cycle, all positions on the exchange were settled on specified dates.
(B) The weekly or fortnightly settlement cycle reduced the volume of trading on the exchange.
(C) Settlement on specified dates gave rise to speculation and sudden rise and fall in share prices.
(D) Rolling settlement requires effective implementation of electronic fund transfer and dematerialisation of shares.
(E) Badla is a facility that allows the delivery or payment of a transaction to be brought forward to an earlier settlement period.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (C) and (D) only
(A) Under the earlier weekly or fortnightly cycle, all positions on the exchange were settled on specified dates. — Correct. Before the reforms, all positions were settled on a weekly or fortnightly cycle, on specified dates.
(B) The weekly or fortnightly settlement cycle reduced the volume of trading on the exchange. — Incorrect. The old cycle increased the volume of trading and gave liquidity to the system.
(C) Settlement on specified dates gave rise to speculation and sudden rise and fall in share prices. — Correct. Settling on fixed dates gave rise to speculation, and prices rose and fell suddenly.
(D) Rolling settlement requires effective implementation of electronic fund transfer and dematerialisation of shares. — Correct. Rolling settlement means fast movement of shares, so it needs electronic fund transfer and demat shares.
(E) Badla is a facility that allows the delivery or payment of a transaction to be brought forward to an earlier settlement period. — Incorrect. Badla is a carry forward system. It allows the postponement of delivery or payment to a later settlement period, never bringing it forward.
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. A new system, i.e, rolling settlement, was introduced in 2000, so that whenever a trade took place it would be settled after some days. Since 2003, all shares have to be covered under the rolling settlement system on a T+2 basis, meaning thereby that transactions in securities are settled within 2 days after the trade date. Since rolling settlement implies fast movement of shares, it requires effective implementation of electronic fund transfer and dematerialisation of shares. …” “…BADLA – This refers to a carry forward system of settlement, particularly at the BSE. It is a facility that allows the postponement of the delivery or payment of a transaction from one settlement period to another. …” |