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Sebi bans carry-forward from July 2

Our Correspondent in Bombay

The Securities and Exchange Board of India on Monday banned carry-forward products from
July 2.

All deferral products - automated lending and borrowing mechanism (ALBM), borrowing and lending of securities scheme (BLESS), modified carry-forward system (MCFS) and continuous net settlement (CNS) -- shall cease to be available for all scrips except for a transitional period, Sebi chairman D R Mehta told reporters after the board meeting in Bombay.

In order to give the market adequate time for orderly unwinding of position, all outstanding deferred position in the current settlement shall be compulsorily liquidated by September 3, he said.

Mehta said an additional position taken on or after May 15 should be compulsorily liquidated by July 2, the day rolling settlement comes into effect. No fresh carry forward positions will be allowed from May 15.

No new deferred positions shall be permitted from the same date, he added.

Sebi not to introduce futures in individual stocks. Options to be introduced in 15-20 stocks.

Mehta said the stock exchanges shall be required to monitor the position of members, announce plan for phased liquidation of position between July 2 and September 3.

Mehta also said stocks that are not on the compulsorily rolling settlement from July two would be brought under it with effect from January 2, 2002. In the interim period, stocks would be traded on uniform settlement cycle (Mondays to Fridays) with effect from July 2, he said.

There would be no price bands on individual stocks from July 2 in rolling settlement and the market regulator will announce a scheme for implementing market wide index-based circuit breakers, he added.

Mehta said index futures have already been introduced and permission has been given to the stock exchanges to introduce index options.

Permission would also be granted for introduction of options on individual scrips from July two, he said, adding that introduction of other derivative products would be considered later.

Carry-forward trading is a popular facility among local investors, accounting for nearly 90 percent of trades at India's 23 exchanges until Sebi suspended short-selling in early March.

Banning the practice is bound to arouse concern over the effect on trading volumes and share prices.

An expert panel last month recommended that carryforward trading be banned once actively traded shares are moved to a system of rolling settlements on July 2.

The board said options trading on select stocks will begin from that date. The start of options trading is intended to provide investors with an alternative hedging method to carryforward trading.

Restrictions on daily share price movements will also be lifted from July 2 for 414 stocks.

What is it?

Carry-forward trading has long played a big role in Indian share markets.

The practice allows an investor to carry forward from one account period to the next contracts involving shares bought or sold on margin. That increases leverage in the market, or the extent of trading financed on credit, thereby increasing trading volume and market liquidity, but also volatility.

Sebi is under pressure to reduce market volatility after Indian stocks plummeted in March and the first half of April. The Bombay Stock Exchange's Sensex fell 29.4 per cent over a six-week period to April 16.

Excessive speculation

Carry-forward trading has been faulted for encouraging excessive speculation that has sporadically caused trouble when investors fail to complete settlements.

In March, the system was plunged into crisis when 10 brokers at the Calcutta Stock Exchange failed to honour their commitments, leaving the exchange to dip into reserve funds to make up for the shortfall.

That crisis and a blizzard of stock market scandals in March involving share price manipulation sliced the market capitalisation of the Bombay Stock Exchange by about $47 billion at one point.

Additional inputs: Reuters & PTI

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