BADLA

Badla in share trading means something in return.

Badla was a local (Home-Grown) carry-forward
system invented on the Bombay Stock Exchange
(BSE) as a solution to the perpetual lack of
liquidity in the secondary market
Badla is a mechanism to avoid the discipline of a
spot market; to do trades on the spot market but
not actually do settlement
The "carry forward" activities are mixed together
with the spot market

Conti
Badla trading involved buying stocks with
borrowed money with the stock exchange acting
as an intermediary at an interest rate determined
by the demand for the underlying stock and a
maturity not greater than 70 days
Like a traditional futures contract, badla is a form
of leverage; unlike futures, the brokernot the
buyer or selleris responsible for the
maintenance of the marked-to-market margin.

Mechanism of Badla Finance

Suppose A has to buy 100 shares of a company at
Rs 50 each. But he doesn't have enough money
now.
The value of shares is very less now, so in order to
buy the shares at current prices, A can do a badla
transaction.
There is a badla financier B who has enough
money to purchase the shares, so on A's request, B
purchases the shares and gives the money to his
broker.

Conti.
The broker gives the money to exchange and the
shares are transferred to B. But the exchange keeps
the shares with itself on behalf of B.
Now, say one month later, when A has enough
money, he gives this money to B and takes the
shares.
The money that A gives to B is slightly higher than
the total value of the shares.
This difference between the two values is the
interest as badla finance is treated as a loan from B
to A.

Evolution of Badla
December, SEBI discontinues the traditional system of badla
1993
where a broker could carry forward his transactions
till the next settlement (no limit on the number of
settlements the trade can be carried forward) without
taking delivery of shares.
February, SEBI sets up the G S Patel Committee to review the
1995
system of carry forward transactions.
March,
1995

The G S Patel Committee submits its report on carry

forward trading. The new system, called the Revised
Carry Forward System (RCFS), recommends a twin-track
system of trading where trades in carry forward and
delivery mode are segregated at the time of execution of
the trade.

January,
1996

SEBI implements RCFS, a twin-track trading system with a 90day limit for carry forward transactions. SEBI puts Rs 10-crore
limit on financier funding, and bans carry forward trading
beyond Rs 50 lakh in scrip.

January,
1997

SEBI appoints the J R Varma Committee to look into relaxation in

certain aspects of RCFS.

July, 1997

The J R Varma Committee submits a new version of RCFS called the

Modified Carry Forward System (MCFS), which recommends
abolition of the twin-track system of trading, removal of the 90-day
trading limit, a Rs 10-crore limit on financier funding and 15%
margin on carry forward trades.

October,
1997

SEBIs board meeting to review the MCFS recommends the

continuation of the twin-track trading system, a 90-day trading limit,
10% margin on carry forward trades, carry forward limit of Rs 20
crore and withdrawal of the Rs 10-crore limit on financier funding.

March , 2000 SEBI adds 34 more scrips to compulsory rolling settlement.

May, 2000

SEBI includes 122 additional scrips in the rolling settlement mode.

The number of scrips under rolling settlement now goes up to 166.

June, 2000

SEBI introduces daily and weekly carry forward mechanisms in

rolling settlement/continuous net settlement (CNS) and higher
margins on incremental positions.

November,
2000

NSE announces the launch of the Automated Lending and Borrowing

Mechanism (ALBM), a facility to lend/borrow securities or funds at
market determined rates with different maturities.

January,
2001

BSE introduces the Borrowing and Lending of Securities Scheme

(BLESS) in which the badla financier gets delivery of shares, which
were lying with the clearing house (under MCFS).

January,
2001

SEBIs Risk Management Committee streamlines risk management

norms for NSEs ALBM and BSEs BLESS.

March, 2001 Stock exchanges decide to implement securities lending under the
ALBM and BLESS facilities.

March, 2001 SEBI decides to shift 200 more scrips to the rolling settlement
mode from 2 July 2001.s
April, 2001

SEBI appoints an 8-member committee to look into the need for

having deferral products in addition to CNS after the introduction of
compulsory rolling settlement from 2 July 2001.

April, 2001

SEBIs 8-member committee proposes a ban on deferral products

like badla, ALBM or BLESS from 2 July 2001, the date on which
SEBI is transferring all carry forward scrips to the rolling mode.

May, 2001

SEBI fixes a board meeting on 5 May to decide on the ban on badla

and other deferral products. The meeting later gets postponed to
May 14.

May, 2001

In its board meeting on 14 May, SEBI bans badla and other deferral
products like ALBM and BLESS, and introduces options on
individuals stocks from July 2. All outstanding positions of members
to be liquidated by 3 September.

Advantages
In India there are restrictions on bank lending against shares. As a
result, liquidity of the stock market is lower than in other
countries. In such an environment Badla provides a system of
financing share transactions and thereby promotes the flow of
funds into the secondary market in shares.
The Badla system is more efficient in providing funds for share
trading than the western system of bank lending against stocks.
In the absence of both Badla and stock lending, the liquidity in the
share market would be limited to those purchasing and selling for
actual delivery. This means short term speculation will not be
possible. The Badla system by enhancing speculative volume adds
to the total volume in the market and thereby makes for better spot
price discovery.

Disadvantages
While Badla allows speculation it does not
perform the hedging function.

The Badla system lacks transparency. This

made it susceptible to manipulation.