The market regulator had sought the opinion of Harish Salve, Solicitor General on the legality of ALBM scheme of the National Securities Clearing Corporation Limited (NSCCL), a subsidiary of National Stock Exchange (NSE) for carrying out settlement of transactions. The opinion was sought following controversies which have arisen in the course of the probe by the joint parliamentary committee probing the securities scam of 2001. Members of the JPC had sent queries to Sebi that ALBM was merely another form of badla (carry forward), violative of the existing Sebi guidelines and responsible for the market crash of March 2001.
The Solicitor General has said that since ALBM does not constitute a carry forward scheme per se circulars pertaining to carry forward schemes would not apply to it. ALBM was specifically the subject matter of the security lending scheme and had to comply with its guidelines. In my opinion, the possibility of abuse of this product (i.e., to use it as a manner similar to badla) would not by itself make it a carry forward system.
NSCCL introduced its modified security lending scheme ALBM integrating it with settlements, in December 1999. During December-March 2000, the turnover in respect of the modified ALBM scheme was not very significant. However, from April 2000, there was a noticeable increase in the turnover of ALBM scheme and the matter was referred by Sebi to an expert committee under JR Verma. Following its recommendations, certain risk containment measures similar to the modified carry forward system was introduced in July 2000. Inspite of this huge spurt in ALBM turnover was noticed till February 2001.
Sebi had sought opinion of the solicitor general on whether from December 1999 to July 2000, NSCCL required permission from Sebi for operating the ALBM as per Sebi guidelines on securities lending and circulars on modified carry forward systems. The SG has said that the product ( modified ALBM) would not require prior approval. According to his opinion, The whole idea of reporting to the Sebi is to enable it to review the working of the schemes for improved monitoring, by imposition of additional safeguards from time to time, as was factually done in the case.
However, the solicitor general has clarified that the detailed terms and conditions of ALBM have not been examined. The focus is on the primary features on which it is suggested that the modified scheme was a radical departure from the original scheme.