Page 66 - DMGT401Business Environment

Unit 2: Industrial Policy and Regulatory Structure

2.3.8 Revised Forward Trading System Notes

SEBI introduced modified forward trading system on October 6, 1995 effective from October 9,
1995. Capital adequacy norms of 3% had been stipulated for individual brokers and 6% for
corporate/institutional brokers. Due to implementation of capital adequacy norms, the limit of
25% of the turnover imposed on carry forward deals by brokers has been removed.

Instead of monthly audit, the brokers are now allowed self-certification on their status on
settlements. SEBI has reserved the right to re-check the certification. Now transactions can be
carried forward for a maximum of 90 days, but squaring off is permitted only up to fifth
settlement, i.e. 75 days. Transactions remaining open at the expiry of this time limit have to be
compulsorily settled by delivery or payment as the case may be.
Stock exchanges are allowed to resume forward trading/carry forward transactions only after
permission from SEBI. The permission is granted only if the stock exchange has screen-based
trading, effective monitoring, surveillance and reporting system and fulfils other infrastructural
requirements.

2.3.9 Derivatives Trading

1. Derivatives: These are financial instruments that are valued according to the expected
price movements of an underlying assets, which may be a commodity, currency or a
security. Examples of derivatives are futures, options, swaps, etc.
2. Futures: These are agreements to buy or sell a fixed quantity of a particular commodity,
currency, or security for delivery at a fixed date in the future at fixed price. Unlike an
option, a future contract involves a definite purchase or sale and not an option to buy or
sell.
3. Options: These are instruments granting the right to buy or sell a fixed quantity of a
commodity, currency, security, etc., at a particular date at a particular price (also called
exercised price). Unlike futures, the purchaser of an option is not obliged to buy or sell at
the exercise price and will only do so if it is profitable; the purchaser may allow the option
to lapse, in which case only the initial purchase price of the option is lost.

4. Swaps: These are means by which intending parties can exchange their cash flows, usually
through the intermediary of a bank. A Currency Swap will enable parties to exchange the
currency they possess for the currency they need. An Interest Rate Swap (IRS) is an
agreement between two parties to exchange interest obligations (or receipts) for a given
notional principle for a defined period.

2.3.10 Capital Issues (Contract) Act (CICA), 1947

According to the CICA Act, companies had to obtain prior approval for any new issue, and for
pricing or public and rights issue. This act gives powers to Government of India to regulate the
timing of new issues by private sector companies, the composition of securities to be issued,
interest rates which can be offered on debentures and preference shares, the timing and frequency
of bonus issues, the amount of prior allotment to promoters, floatation costs, and the premium
charged on securities. Now this Act has been repealed by Capital Issues (Control) Repeal Act,
1992.

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