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Dithering on Forward Trading

THE impasse over the implementation of the revised scheme of forward trading proposed by the Securities and Exchange Board of India (SEBI) should not surprise anyone. The history of the past 70 years or so, beginning with the turning down by the Bombay Stock Exchange brokers in 1925 of the then government's offer to grant them a monopoly of organised trade in securities by a charter in return for the government assuming authority to control the rule-making power of the stock exchange, has been one of constant tussles between the authorities and the share brokers over matters relating to disciplining of share trading. Every attempt by the government to introduce .a modicum of discipline on the speculative proclivities of the brokers has been fought tooth and nail by the latter feigning to fear "official tyranny in matters of free monetary trade', as they had put it in 1925. Unfortunately, because of the brokers' possession of 'great influence, authority and wealth' and because of the government's mistaken notion that stock exchanges serve as a barometer of the general state of the economy, the government, while it has been ready to strike, has been unwilling to wound even though the failure of the much- touted self-regulation by the brokers, their monopolistic ways of functioning, the bouts of unbridled speculation and the gross over-trading by members of stock exchanges far beyond the resources at their command to back up their commitments have all been well established facts. Right from the second world war period when the Defence of India Rules were applied in September 1943 to prohibit forward contracts and 'badla' financing and confine all dealings to ready delivery contracts for a period of seven days, share brokers have resorted to manipulative and even illegal devices to carry on speculation, carry forward dealings being resumed in the end not by formal official sanction but as a result of the government's policy drift, lethargy and connivance. For instance, after the June 1969 ban on forward trading, the J J Anjaria committee had recommended the lifting of the ban and permitting forward trading with tight controls, but the Indira Gandhi government was not impressed and the ban continued. But by the middle of 1972 the stock exchanges had evolved a system under which carry forward trading was brought back in a special A' group of shares. Officially, it was only in January 1983, more than 10 years later, that the government permitted the stock exchanges of Bombay, Calcutta, Delhi and Ahmedabad to institute forward trading in delivery spells of 14 days up to a total period not exceeding 90 days from the date of the initial contract. As the G S Patel committee (March 1995) has pointed out, notwithstanding safeguards in the form of daily margins, ad hoc margins and limits on individual holdings to control excessive speculation, "frequent stoppage of work and payment crisis took place because of speculative excesses".

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