SEBI board likely to relax carry-forward rules

Kevin James in New Delhi

The Securities and Exchange Board of India is meeting next week to discuss a proposal for a major relaxation in the existing carry-forward system to make it practical and acceptable to market participants.

Among the stipulations where the market watchdog body is planning relaxation are cut in margin, daily reporting norms and more flexibility in carry-forward transactions, according to SEBI sources.

According to finance ministry sources, revival of the carry-forward system is expected to be a major item in the proposed package which Prime Minister H D Deve Gowda promised the industry captains on December 31, 1996.

The prime minister is expected to announce the package by the end of this month.

The ministry sources said the package will be mainly aimed at reviving the capital market and thus easing the liquidity problem for the corporate sector.

The package will contain some long-term measures not only to boost the market sentiments but to sustain it also, a senior ministry official said.

A decision on avoiding double taxation on dividends is also expected to be in the proposed package.

Concurrently, the industry ministry is also planning to announce a detailed guideline for approval of foreign direct investment proposals by end of January. The ministry, which is expected to announce the guidelines this week, has postponed it to time it with the PM's package, it is reliably learnt.

Liquidity problem and a transparent FDI approval systems were among the major demands of the industry.

According to SEBI sources, the other areas where SEBI is likely to make a relaxation are on the limit on carry-forward transactions by brokers out of the total transactions in a day.

Domestic stock exchanges and the investing community have also been persistently demanding revival of the carry-forward system. Last week Bombay Stock Exchange President M G Damani wrote a letter to SEBI Chairman D R Mehta for reviewing the present carry forward system, which have failed to take off at the stock exchange ever since introduction in January last year.

Although SEBI has assured to revise the carry-forward system in three months time when it was introduced in January 1996, it has been hesitant to do so until now.

Sources said that both the finance ministry and SEBI are now convinced of the need for an effective forward trading system which is generally accepted in financial markets as an essential ingredient for creating an efficient market and for performing the function of price discovery. It also helps investors to take a long view of the market based on their expectations on future course of the economy and corporate performance.

A major criticism about the revised carry-forward system is that it is too rapid for investors to take a long-term view of the market and corporations.

UNI