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BADLA System
Badla was an indigenous carry-forward system invented on the Bombay Stock Exchange 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
BADLA System
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 broker not the buyer or selleris responsible for the maintenance of the marked-to-market margin.
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.
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
SEBI issued a directive in December 1993 prohibiting the carry forward of transactions.
ADVANTAGES
1. 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.
ADVANTAGES
2. The Badla system is more efficient in providing funds for share trading than the western system of bank lending against stocks.
ADVANTAGES
3. 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
1. While Badla allows speculation it does not perform the hedging function. 2. The Badla system lacks transparency. This made it susceptible to manipulation.