October 16, 1995


The President/Executive Director
All Stock Exchanges

Dear Sir,

Revised Carry Forward System

1. As you are aware, Securities and Exchange Board of India (SEBI) appointed on February 22, 1995, a committee under the Chairmanship of Shri G S Patel, to review the system of Carry forward transactions in the stock exchanges. The recommendations of the G S Patel Committee were considered in the SEBI Board meeting held on July 27, 1995. In this meeting Board decided to introduce a revised Carry Forward system, subject to the following prudential conditions and precautions :

a. Sock Exchanges would be allowed to introduce carry forward system only with the prior permission of SEBI. Such permission would be accorded subject to the availability of suitable infrastructure of the Stock Exchanges and their capability to have an effective monitoring and surveillance system. Regarding infrastructure, it would be essential for the stock exchanges to have screen-based trading before the carry forward system could be introduced. The responsibility of monitoring, surveillance and reporting would be cast on the Executive Director of the Exchange, who must be empowered in this regard, if necessary, by the change of bye-laws, rules and regulations or the Exchange. The Exchanges would also ensure the submission of timely and regular information to SEBI about various parameters and their implementation.b. The Stock Exchanges must introduce the “twin track” system which will provide for segregation of transactions into carry forward transactions and cash transactions. Each carry forward transaction will be identified with a ID number till its final settlement. Each broker will have to submit a monthly Auditor’s certificate., indicating that there has been no violation of the time limit. The jobbing and transactions representing trading on broker won account would also be shown separately.

c. The transaction would be allowed to be carried forward for a period not exceeding 90 days. While the transactions would be allowed to be squared off upto 5th settlement (75th day), a transaction remaining unsettled till this day, will have to be settled by delivery or payment, as the case may be.

d. In the absence of capital adequacy norms for brokers, the margin on carry forward transactions would be imposed on gross basis in accordance with the following graded scale:

Upto Percantage

1st settlement 20
2nd settlement 30
3rd settlement 40
4th settlement 50
5th settlement 50
6th settlement Delivery/Payment

It may be noted that the above are daily margins. The Board also desired that outstanding positions will have to be marked to market. The possibility of enforcing this system of mark to market on a daily basis as against weekly basis might also be explored.

e. For the same reason mentioned above i.e the absence of capital adequacy norms for brokers, the broker-wise outstanding position on any day in respect of carry forward transactions should not exceed 25% of a broker’s total transactions on that day. The calculations in this regard would be made the next day. In case this limit is exceeded on any day, as is found during the calculations on the next day, the broker concerned would be allowed to undertake any further carry forward transactions till the positions rectified.

f. The financiers funding the carry forward transactions being lenders of funds should not permitted under any circumstances to square up their positions till repayment of the loan and the shares received by such Financiers against those transactions should be deposited and kept in safe custody of the clearing house of the stock exchange/or its Authorised Agent.

g. ‘Vandhas’ or objection memos will be rectified immediately and the ‘kapli’ system and `chalu upla’ transactions will not be permitted.

h. Every member will be required to keep books of record of the source of finance with sub-accounts being maintained in the clearing house.

i. The carry forward position shall be disclosed to the market scrip-wise and broker-wise by the Stock Exchanges ant the beginning of the carry forward session.

j. The brokers must ensure segregation of client account and own account in accordance with the existing guidelines issued by SEBI.
2. SEBI received representations from the Bombay Stock Exchange and other stock exchanges regarding the difficulties in implementing the conditions, especially related to graded margins starting from 20% and going upto 50%, restriction that outstanding position on any day in respect of carry forward transaction not to exceed 25% of a broker’s total transactions on that day, monthly auditor’s certificate to certify that there were no violations of the time limit for carry forward transactions, and disclosure of scrip-wise outstanding positions of broker. The BSE also proposed to implement capital adequacy norm at 3% for individual member and 6% for corporate members and requested that the Board review its decision taken on July 27, 1995 regarding conditions for introduction of revised carry forward system.

3. In the light of these representations and the proposal to implement the capital adequacy norms, the SEBI Board reconsidered its earlier decision of July 27, 1995 in its meeting held on October 5, 1995 and changed some of the earlier conditions of July 27, 1995 and added the conditions regarding the capital adequacy. The modifications/changes are as under:-

i. Stock Exchanges will be required to implement capital adequacy norms of 3% for individual members and 6% for corporate members in respect of their outstanding position. These norms will be reviewed and revised further over the time by the SEBI after taking into consideration all the relevant factors and in particular investor protection. However, the requirement of minimum base capital of Rs. 10 lacs for Bombay and Calcutta Stock Exchanges, and Rs. 7 lacs for Delhi and Ahmedabad Stock Exchange and Rs. 5 lacs for other stock exchanges will also apply. It may be clarified here that the base capital will form part of the capital for the purpose of determining the capital adequacy as indicated above.ii. In view of the above capital adequacy requirements, the condition stipulation graded margins of 20% to 50% on carry forward transactions is replaced by the following margin system as recommended by G S Patel Committee:

a. There will be a minimum daily margin of 15% on gross positions across the board. However, the exchanges may impose higher rate of margin for more volatile scrips. No daily margin will be payable for those outstanding sales position in respect of which shares sold are deposited in the clearing house after the sale. Margins from purchases as well as sales for actual delivery may be fixed at 50% of the rates that may be fixed for the net jobbing and gross carry forward transactions.b. The rate of carry over margins will not be less than the rate of daily margins. In addition, the profits to the extent of at least 25% should be impounded while fixing the carry over margins.

c. The margins are to be levied on mark-to-market system on a weekly basis with the losses being collected and gains being withheld in the first week of fortnight. Efforts should be made to apply this on daily basis later.

d. The exchanges may impose ad hoc margins also in cases on individual brokers or scrips if the situation so demands.
iii. Again in view of the requirement of the capital adequacy norms being accepted, the condition that the broker’s outstanding position on any day in respect of carry forward transactions will not exceed 25% of the Broker’s total transactions on that day is deleted.However, initially, the limits on the carry forward position will be the same as were operative on Bombay Stock Exchange on December 13, 1993, i.e., an over all limit of Rs. 5 crores with sub-limits of Rs. 3 crores each on purchases and sales and Rs. 50 lacs for each individual scrip. Further, there will be an over all limit of Rs. 7.5 crores with sub-limits of Rs. 4 crores each for sale and purchase positions with a sub-limit of Rs. 1 crore in respect of each scrip outstanding at the close of business on any day within the settlement period of 14 days, subject to the condition that the limits applicable to a broker in terms of capital adequacy norms will not be exceeded.

iv. The condition that the scrip wise carry forward position of each broker shall be disclosed to the market, is deleted and instead the stock exchange will make public only the daily overall outstanding position for each scrip. However, scrip-wise position of a broker will be available to the stock exchange.

v. The requirement of monthly auditor’s certificate is substituted by self certification by brokers on monthly basis certifying that 90 days time limit has not been violated. However, stock exchanges and SEBI would exercise the right to order an audit or verification whenever required.
4. As regards financing of carry forward transactions, it may be further clarified that the members doing financing of carry forward transactions will not be allowed to exceed a limit of Rs. 10 crores per member as recommended by G S Patel Committee.

5. The earlier decisions of the Board as given in para 1 except for the modification and changes as detailed in para 3 would be applicable. As regards the detailed norms for capital adequacy and also the other recommendations of G S Patel Committee, some of which are advisory in nature, the exchanges will be advised separately.

6. The stock exchanges would be allowed to introduce carry forward system after satisfying the conditions and modalities detailed above and after seeking formal approval from SEBI in that regard.
Yours faithfully,

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