Futures and Options in India
BY: YOGIN VORA ON MARCH 25, 2010 NO COMMENT
* Options Trading
* Options Trade
* Derivatives Trade
* Trading in shares
The Indian capital market has witness impressive growth and qualitative changes, especially over the last two decades. In the fifties, sixties and most of the seventies, it was in a dormant stage when the investors were generally not familiar with, or inclined towards, the corporate securities. During this time, only few companies accessed the capital market. As a consequence, trading volumes were low during these years. The process of liberalization of the Indian economy since the early nineties has contributed to ...view middle of the document...
This led to a reduction in the stock market activities.
A forward trading system was introduced by the government of India in July, 1983 in the Bombay, Calcutta, Delhi and Ahmedabad stock exchanges. Under the system, the listed shares were divided into two categories: specified and non-specified. The system permitted the carry- forward, or badla trading in specified shares. The underlying principle of the system was simply this that although, strictly, forward trading could not be undertaken, transactions were done on a spot basis, but the settlement was carried forward.
The system was stuffed with a strict schedule of regulatory measures like daily margins, carry over margins, automatic margins, limits on holdings of individuals, limits on price fluctuations- daily and fortnightly, etc. the system induced liquidity in the stock market, which was largely due to participation of the retail investors who otherwise had no access to fund the purchases. The badla system of trading worked well and led to a stupendous growth of the market in terms of various parameters like the number of investors, number of new issues, market capitalization and turnover.
In 1991, the Ministry of Fi9nanace asked the Society for Capital Market Research and Development to undertake an expert study of the trading in shares in stock exchanges, one of the terms of reference to look into the working of Badla system in shares and its effect on trading. In terms of the finding of the study, it was observed that, typically only about one-fourth of the outstanding position at the end of settlement got settled by actual delivery, while the remaining bulk got carried forward to next settlement. The committee did not seem to be in agreement with the brokersâ€™ defence of the system as a provider of liquidity. If felt the carry forward system to be totally unjustifiable and unhealthy practice in economic terms. The system of Badla helps neither speculators, who have neither money to pay nor shares to deliver. In its view, the liquidity provided by speculators, who are not interested in paying and taking delivery on the settlement date, can not be considered as a genuine liquidity. Accordingly, it recommended doing away with the carry forward system.
The Badla system was banned in December 1993 by the market regulator, SEBI, presumably because it led to excessive speculation and/or its misuse. Based on the recommendations of the G S Patel committee that the SEBI had set up, a new carry forward trading system was introduced in January 1996. However, the system did not fond much favour with the broking and investing community. The revised carry forward system entails a number of restrictions which have made it unattractive.
* Limits on the Carry Forward Transactions
* Limited Carry Forward
* Cumbersome Reporting Requirement
There were voices for relaxations in the stringent conditions laid down in the revised carry forward scheme from time to time and even...