Sebi plans action against NSCCL

Mumbai: The Securities and Exchange Board of India (Sebi) is planning to take legal action against the National Securities Clearing Corporation (NSCCL), the clearing corporation for the National Stock Exchange (NSE), for its alleged failure in seeking Sebis permission for altering the ALBM (automated lending and borrowing mechanism) scheme in February 2000.

In a reply to a clarification sought by S S Ahluwalia, a member of the joint parliamentary committee (JPC), Sebi said legal action against NSCCL is under examination. Ahluwalia had raised objections over the ALBM modification by NSCCL without Sebis consent and had sought explanation from the clearinghouse. "We may be apprised as to whether Sebi considered any legal action against NSCCL for introducing a carry-forward type of product in the garb of security-lending without the prior permission of Sebi," the JPC said.

According to Sebi rules, it appears that no exchange can introduce carry-forward products without Sebis approval, the JPC said while seeking a reply from Sebi. According to the JPC report, initially NSCCL had sought permission from Sebi to become an authorised intermediary for stock-lending under the Sebi securities lending scheme.

Though Sebi had granted permission in December 1998, the NSCCL's stock lending activity did not pick up for a long time. Subsequently, some time in February 2000, NSCCL is said to have altered the securities lending system and commenced their earlier existing ALBM scheme, which is equivalent to the modified carry-forward scheme, the JPC stated.

It pointed out that NSCCL neither sought Sebis permission for commencing the revised scheme nor did it give any permission to it. But Sebi asked for an explanation from the NSE and appointed a committee headed by J R Varma to look into the safeguards for the ALBM session, the JPC said.

The NSEs ALBM was started by NSCCL under SLS 1997 in February 1999 after seeking Sebis approval as an approved intermediary under securities-lending system. The NSE subsequently modified the scheme in December 1999. The volumes were negligible till March 2000, and picked up in April 2000, Sebi informed the JPC in a reply to another query.

In May 2000, Sebi had set up a group under the chairmanship of Varma to examine the issues related to the modified ALBM. The group submitted its report in July 2000. It had recommended that certain key risk containment measures need to be mandated for ALBM.

The issue was also discussed in the meeting of the risk management group constituted by Sebi. Based on the recommendations of the Varma group, it was decided in July 2000 that ALBM will now be allowed as a generic product subject to risk management measures, including position limits and margins.

The NSE was granted permission under these guidelines in October 2000, Sebi said. Nearly one year after granting permission to the NSE, the Varma group had recommended a ban on all deferral products, including ALBM/BLESS (borrowing and lending of securities scheme) and MCFS (modified carry-forward system) from 2 July 2001 onwards before introducing a large-scale rolling settlement on the bourses.