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The L C Gupta Committee appointed by the Securities and Exchange Board of India to suggest policy measures on capital market derivatives has advocated the introduction of future trading in stocks in a phased manner simultaneously along with a programme of improvements and removal of various existing weaknesses in operations of the stock exchanges in the country.

The committee, headed by Dr L C Gupta, who recently submitted its first draft report (part-1) to the SEBI, has recommended that equity index futures are rightly feasible and should be launched first, to be followed by other forms of derivatives.

The committee is convinced that there exists considerable interest among local players (both hedgers and speculators) in all the three main types of derivatives, the maximum interest being in stock index futures.

The committee, which found several inadequacies in administrative and monitoring machinery of the stock exchanges, observed that stock exchange members have acquired vested interests in keeping trading cycles different in order to deliberately generate arbitrage opportunity.

This is serving only the interests of speculators and not those of genuine investors nor of market development, which spoils the character of the cash market.

Emphasising on implementation of a uniform trading cycle among all exchanges till a rolling settlement is adopted in India, the committee felt that the introduction of derivatives trading would require more stringent rules and monitoring mechanism with high standard of discipline.

In this context, it suggested acceleration of the progress of the depository system in future trading of stocks. However, the committee wondered whether all the securities composing a stock index, used for index futures, would necessarily be in depository mode.

For this reason, it insisted that all the scrips of the particular index be included in the depository mode to avoid delay in the introduction of derivatives trading.

While index-based derivatives trading does not itself involve deliveries, it given rise to arbitrage transactions between the index derivatives market and the cash market. Settlement problems of the cash market have the effect of impairing and weakening the arbitrage process by making it risky and costly.

In this context, the committee said the mixing of cash and forward trades should be set right to provide a sound foundation for future trading.