In a confidential note written to SEBI executive director Pratip Kar, Sodhi said that a quick study has revealed that a large number of scrips in the specified group at both the DSE and the Bombay Stock Exchange (BSE) do not meet the qualitative and quantitative criteria. DSE has recently started providing carryforward at the bourse. "A company in the specified group having a narrow capital base is an easy target for price manipulation...As the trade guarantee fund guarantees all transactions including those in the badla segment. It is essential that onlythose scrips which meet the above criteria should be in the specified group," said Sodhi.

Sodhi goes on to say that under the current system a broker is permitted to carryforward positions of up to Rs 20 crore and can therefore effectively borrow Rs 18 crore on the payment of carryforward margin of 10 per cent. "Even if 20 brokers in a stock exchange touch the upper ceiling there would be a credit risk of Rs 360 crore in the system. A rough and ready solution could be to either decrease the upper limit of Rs 20 crore or increase margins. Credit rating of brokers, linking the ceiling with net worth of brokers and a proper credit appraisal mechanism at the stock exchange level are the basic measures that need to be addressed," states Sodhi.

"At present, stock exchanges monitor broker level positions only. For instance, if one client of a broker has a buy position of Rs 1 crore in SBI and another has an equivalent sell position in SBI, the risk perceived at the stock exchange level is zero and the broker isnot required to pay any margin. This is extremely risky because either of the clients, or both, could fail to honour their commitments. Therefore, for trades, at least in the specified group, margins as well as other risk management measures need to be applied at the client level," states Sodhi.

"Earlier, the maximum price movement in a scrip could be 25 per cent during a week. Now, maximum movement can be 46 per cent on the plus side and 33 per cent on the negative side. A market manipulator now has the advantage of a shorter timeframe to rig up the price and his requirement of funds for this purpose would also be smaller as the entire operation can be carried out in a shorter period," states Sodhi.

"The basic idea of identifying volatile scrips was that only a few scrips which are way out of the market trend could be identified and a close watch kept over them. During the last week there were 35-40 scrips which attracted this margin. The very objective of imposing this margin appears to have beendiluted," says Sodhi.