"It is worth pointing out that for the purpose of declaration, the outstanding position of type II members are also included, whereas they are not entitled to carry forward their trade," the report states. Type II members are brokers who have not opted for the carry-forward system. They have to either square-off their positions or settle it at the end of the settlement period by delivering stocks or finances.

"It has also been noticed that outstanding quantities announced by BSE in its notice are many times higher than the quantities traded in the badla trading session," the report adds in the light of the positions of Type II members which is included in the carry-forward list.

Further the report has alsohighlighted the loopholes in the mechanics of the "bhav-bhav badla" implemented on the exchange. "It has been observed that during the course of badla trading, the outstanding positions are mutually squared-off between the long buyer and short seller, while the actual delivery or finances are not called for against such transactions," highlights the report.

Outstanding positions which are mutually squared off between the long buyer and the short seller without the involvement of either money or securities is called "bhav-bhav badla". The Sebi report categorically states that the magnitude of these transactions is almost 80 to 90 per cent of the total badla transactions.

"In our opinion, the bhav-bhav badla transactions are nothing different from the extension of trading by one more day of the next settlement and in no way fulfils the basic requirement of carry-forward trading," the Sebi inspection team has maintained.

The Sebi inspection report is likely to be discussed at the nextboard meeting of the exchange. The "basic requirement" as per Sebi guidelines is the need for financing or stock lending. Further, Sebi guidelines also specify the need for compulsory settlement with deliveries, which has not been followed on the BSE in many of the instances cited by the Sebi inspection report.

It should be recalled that Sebi had laid down certain conditions for the implementation of the revised carry forward system on the Mumbai bourse in 1997. As per the conditions of the RCFS, for the carry forward transactions funded by the financiers, the deliveries received should be deposited and kept in safe custody of the clearing house of the stock exchange. Normally, in vyaj badla transaction, the financiers accept the delivery on behalf of the actual buyer and the shares received are kept in the clearing house of th exchange.

On "mandi badla", which signifies the bearish phase of the market, shares are delivered by the stock lender on behalf of the actual seller and are given tothe purchaser and no shares are, therefore, deposited with the clearing house of the exchange. This is aimed at providing security to the financier and also debarring them from squaring-off their positions. On both these issues, the exchange has not complied with the norms and conditions in place, states the report.