According to sources, a decision to this effect was taken at a meeting between BSE and Sebi officials on September 9. BSE, in its internal circular issued on September 10, has intimated brokers not to settle their pay-in obligations for the settlement ended September 11 through the kapli system.

Kapli, according to the market terminology, is the reference made to credit notes which brokers use to meet their pay-in obligations.

Committments between brokers are adjusted by the usage of kaplis instead of actual cash inflow and outflow, especially in case of brokers who have more than one membership card. There is no interest element involved in the above form of discharging the settlement liabilities. "The usage of kaplis in a clearing system is capable of misuse," said L K Singhvi, senior executive director ofSebi incharge of surveillance. Sources at Sebi cite the example of the mismatch which occured at the BoI clearing house of BSE in June which led to problems within the exchange. Most of the pay-in obligations related to the positions built at the counters of BPL, Sterlite, Videocon International -- these were not actually settled but the contracts were issued to that effect.

Interestingly, Sebi sources also hint at the circular issued to BSE in 1997 when the revised carry-forward system was introduced on the exchange based on the model of the JS Varma committee report. The circular, according to sources, was a clear indication for the removal of kapli system which, they claim, could lead to systemic problems. According to market participants, although the system could be manipulated to suit the interest of a section of players, the objective with which the system was practised in BSE was in line with conventional trade practises.

Market observers also highlight the negative impact of removing thissystem on arbitrageurs, who would be badly hit in the absence of liquidity. This also could lead to a sharp rise in interest rates as brokers, who rely on money flowing in from outstation clients and sub brokers, would need to compulsorily settle their obligations in money terms rather than by issuing kaplis.

However, critics, who provide an insight into the working of an exchange which is broker dominated, highlight the impact on those who have manipulated the system. "The removal of this system is likely to hit brokers who run a clearing house within a clearing house," said a top BSE broker.