Senior treasury officials said such clandestine deals does often attract the attention of internal controllers, Reserve Bank inspectors and statutory auditors as the pricing on the deal tends to show a variance from the prevailing market price of the day. "Under such circumstances, we cite volatile securtities market conditions as an excuse," said a dealer in major foreign bank.

While talking to The Financial Express, an RBI official admitted to the existence of illegalforward trade on large scale. "We are aware that such transactions are happening in the market mainly when an on-tap issue is announced...the market comes to know about the coupon rate at least three to four days in advance and get ample time to structure the deal," he said.

The RBI official, however, pleaded helplessness in detecting and curbing such deals: "As paperwork is doctored in the case of such transactions, it becomes very difficult for RBI to detect such illegal deals".

Section 16 of the Securities Contract Regulation Act (SCRA), 1956, states: "The government of India has the power to ban any kind of transaction in the securities market". In line with this, the RBI had issued a notification in 1969 which said that except `spot transaction deal' (delivery verses payment deal) all other types of transactions in GoI-Sec market are banned in the inter-bank market. In other words, the RBI explicitly debars banks from trading in securities not held in their names.

Spot transaction is a currentdelivery vs payment (DVP) system -- a current business transaction between two parties is where one party sells the security and the other party buys the security instantly.

It is a dealing room transaction where the parties wanting to sell a particular security quote their price and a party interested in buying that security quotes the price, both of which are flashed across the NSE trading screen a second after a party quotes the rate. If it is acceptable to those involved, the deal is put through immediately.

The settlement of the particular trade transaction is done by way of routing it through the SGL form and RBI acts as a depository and transfers the security into the buyers' account and transfers funds to the sellers' account. At the time of settlement, the parties involved are required to fill up the SGL form issued by the RBI and submit it at the time of settlement.

When the deal is brokered by NSE member, then the deal is put through within a span of trading date plus five days. According tomarket sources, a clutch of private sector banks and foreign banks went for arbitraging between the overnight call money market and government securities markets on Thursday by striking forward deals with other traders for the on-tap three-year paper which was sold on Friday.

Most bankers were borrowing money from call market at an average rate of 6 per cent and striking forward deals with traders for the three-year paper below par between Rs 98-Rs 99, earning a spread of 2.5 to 3 paise for a three-day lock-in period.

According to market sources, forward deals worth around Rs 60 crore were struck on Thursday. They are able to make a spread of 2.5 to 3 per cent after taking into account the interest paid on the overnight money and the cost of selling the security below par. "Most banks are locking the security for three-day period. After selling the security 2 paise below par and paying 1.5 paise interest on call the banks are making between 2.5 paise and 3 paise," said a fund manager from a leadingsecurity house.