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Presentation on BADLA SYSTEM

BY

VIDYADHAR PANDEY

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The "carry forward" activities are mixed

together with the spot 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

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EXAMPLE

Suppose you buy 1,000 shares of Infosys at Rs

3,500, your cash outflow is Rs 35 lakh. Instead

of paying cash, you can ask your broker to find

a borrower to finance your trade. This process

of buying stocks with borrowed money is

badla trading.

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WORKINGOF BADLA SYSTEM

The stock exchange acts as an intermediary

between you and the actual lender.

You will be charged an interest rate for

borrowing, which will be determined by the

demand for that stock under badla trading

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Thus, higher the demand for Infosys under

badla trading higher will be the interest rate.

You can keep your borrowing unpaid for a

maximum of 70 days, after which you will

have to repay the badla financier through the

exchange

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HISTORY OF BADLA TRADING

The Joint Parliamentary Committee on

Irregularities in Securities and Banking

Transactions, 1992 (JPC of 1992) discussed the

irregularities of badla

SEBI issued a directive in December 1993

prohibiting the carry forward of transactions.

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However it was recommended by the G.SPATEL COMMITTIE in the year 1995 and thecarry forward transaction in the security

market were permitted

It was further modified by the J.R VARMACOMMITTIE in the year 1997

a daily margin of 10 % was to be paid

50 % of which was to be paid in advance

forward trading limit was fixed for 20 crores

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The NSE introduced futures contracts on the

Nifty in the year 2000

Finally badla was banned in the year 2000-01

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Comparission between badla and

futureBadla Futures

Expiration date unclear Expiration date known

Spot market and different expiration dates are

mixed up

Spot market and different expiration dates

all trade distinct from each other.

Identity of counterparty often known Clearing corpn. is counterpart

Counterparty risk present No counterparty risk

Badla financing is additional source of risk No additional risk

Badla financing contains default-risk premiaFinancing cost at close to riskless thanks to

counterparty guarantee

Asymmetry between long and short Long and short are symmetric

Position can breakdown if borrowing/lending

proves infeasible

You can hold till expiration date for sure, if

you want to