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.
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
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
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
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.
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.