The Modified Carry Forward System (MCFS) which emerges from the recommendations of the Group (majority view) is summarized below.

• Precondition for adopting MCFS in any exchange

  
  Any exchange which intends to adopt the MCFS must demonstrate that it has a well designed software for margin computation and well established governance structures and administrative infrastructure for monitoring and enforcing the margining system.
  
  Prior to granting permission to an exchange to adopt the MCFS, SEBI should carry out an inspection of the exchange to satisfy itself about the adequacy of its margining system. A further inspection of the exchange should be carried out six months after adoption of MCFS to verify that the margining system works properly under actual trading conditions.
  
  

• Shares eligible for inclusion in MCFS

  
  Though the actual choice of scrips for carry forward is a decision to be left to the exchange, it is essential for market integrity that the scrips have a sufficient floating stock and high liquidity.
  
  

• Uniform margin

  
  A uniform minimum margin of 10% would be imposed on both carry forward trades and delivery trades on gross basis. This is a minimum margin and exchanges would be free to levy higher margins. Moreover, in periods of excessive volatility as in mid January 1997 or end March 1997, there may be a need to step up the margins temporarily. Margin payments by the brokers must be value dated the same day.
  
  Over a period of time, exchanges must move towards realization of all margin payments before the next day's trading begins. The Group reiterates that margins must be levied on gross positions as is mandated at present. Exchanges may levy ad hoc margins on members who are considered financially weak or have positions which are unduly large in relation to their capital adequacy.
  
  The only exception to the uniform margining system would be for sale transactions where the seller deposits the shares up-front for delivery.
  
  

• Capital adequacy and other prudential guidelines

  
  The Group reiterates the importance of maintaining capital adequacy ratios at such levels as SEBI may mandate from time to time, and of conforming to various prudential guidelines of SEBI like segregation of broker and client accounts both for money and for shares.
  
  

• Vyaj badla

  
  In the case of vyaj badla in respect of dematerialised shares, a pledge of the shares should be marketed in the electronic records of the depository. In the paper based system, the Group recommends that shares received by vyaj badla financiers should continue to be deposited with the clearing house as at present. In addition to other risk containment measures, the clearing house should at all points of time have an insurance policy covering the aggregate value of shares lying in the clearing house.
  
  

• Regulatory powers of the exchanges

  
  Exchanges may suspend carry forward trading in any scrip when aggregate outstanding position in any security exceeds pre- announced limits. Exchanges should have adequate monitoring and surveillance systems to enable timely use of the various powers vested in them to regulate the market.
  
  
• Note of Dissent to The Report of the Group to Review the Carry Forward System By Dr. R. H. Patil