badla mechanism

7/17/2019 badla mechanism

http://slidepdf.com/reader/full/badla-mechanism 1/27

CHAPTER NO: 1

INTRODUCTION



CHAPTER NO: 1

I NTRODUCTION

HISTORY

Badla was an indigenous carry-forward syste in!ented on t"e Bo#ay $toc% E&c"ange as a solution to

t"e 'er'etual lac% of li(uidity in t"e secondary ar%et)

*"en a #ull ar%et is gaining "old and w"en s"ares 'rices are e&'ected to reac" di++ying "eig"ts, t"e one

coon refrain aong t"e sall in!estors is t"e lac% of alternati!es for ulti'lying returns t"roug"

le!eraging ones in!estent)

T"e (uestion often arises w"en one "as t"e ca'acity and standing to o#ili+e funds for in!esting in t"e

ar%et and one is loo%ing for a systeatic in!estent a!enue)

All of w"ic" "el' in increasing ones returns any ties o!er - if used correctly)

*it" t"e #eginning of t"e stoc% ar%ets, any of t"e tec"ni(ues w"ic" closely a''ro&iated o'tions and

futures cae into our financial ar%ets)

Badla can #e useful for an acti!e in!estor if "e wis"es to le!erage on "is in!estents t"ere#y ulti'lying

"is returns)

Badla were #anned #y t"e $ecurities and E&c"ange Board of India .$EBI/ in 0112, effecti!e 3arc" 0114,

aid co'laints fro foreign in!estors, wit" t"e e&'ectation t"at it would #e re'laced #y a futures-and-

o'tions e&c"ange)

T"e 5oint Parliaentary Coittee on Irregularities in $ecurities and Ban%ing Transactions, 0116 .5PC of

0116/ discussed t"e irregularities of #adla)

$EBI issued a directi!e in Dece#er 0112 'ro"i#iting t"e carry forward of transactions)

Howe!er it was recoended #y t"e 7)$ PATE8 CO33ITTIE in t"e year 0119 and t"e carry forward

transaction in t"e security ar%et were 'eritted

It was furt"er odified #y t"e 5)R :AR3A CO33ITTIE in t"e year 011;



T"e N$E introduced futures contracts on t"e Nifty in t"e year 6<<<) =inally #adla was #anned in t"e year

6<<<-<0



CHAPTER NO: 2

CONCEPTUAL DATA



CHAPTER NO: 2

CONCEPTUA8 DATA

CONCEPT OF BADLA:

Badla, in coon 'arlance, is t"e Carry-=orward syste w"ic" eans getting soet"ing in return)

T"e #adla syste of transactions "as #een in 'ractice for se!eral decades in t"e $toc% E&c"ange, 3u#ai)

T"e #adla syste ser!es an i'ortant need of t"e stoc% ar%et) If an in!estor feels t"at t"e 'rice of a

'articular s"are is e&'ected to go u' or down, wit"out gi!ing or ta%ing t"e deli!ery "e can 'artici'ate in

t"e 'ossi#le fluctuation of t"e s"are)

=inancing in Badla, in effect, "as two as'ects to it, naely

0) $eed"a #adla or :ya> #adla- Here t"e financiers 'artici'ate

6) Und"a #adla - Here t"e stoc% lenders 'artici'ate)

T"ere is a lottery tic%et costing Rs)9<, first 'rice is 0 crore ru'ees) ?ou don@t "a!e a single 'enny to #uy it,

so you tal% to your friend and "e #uys it for you on your #e"alf)

If you win, you don@t "a!e to 'ay t"at friend any s"are fro t"e 0 crore you won)

?ou only "a!e to gi!e "i Rs) 9< after winners are declared and in t"e eantie interest on t"at 9<

ru'ees as long as t"e result doesn@t coe)

T"at@s "ow Badla syste rolls)

WHAT IS BADLA?

In t"e #adla syste, a 'osition is carried forward, #e it a s"ort sale or a long 'urc"ase)

In t"e e!ent of a long 'urc"ase, t"e ar%et 'layer ay want to carry forward t"e transaction to t"e ne&t

settleent cycle and for doing t"is "e "as to co'ensate t"e ot"er 'arty in t"e contract)

T"e seed"a #adla financier enters into t"e syste to lend oney to t"e ar%et 'layer for a return)



T"is is easured as interest on t"e funds ade a!aila#le for one settleent cycle, i)e) one wee% or a

longer 'eriod in case of #oo% closure #adla syste)

$iilarly und"a #adla or contango c"arges are returns 'aid #y t"e stoc% #orrower to t"e stoc% lender)

In a s"ort sale, w"en t"e ar%et 'layer wants to carry forward t"e transaction to t"e ne&t settleent cycle,

"e "as to #orrow t"e stoc%s to co'ensate t"e ot"er 'arty in t"e contract)

T"e c"arge 'aid on t"e #orrowed stoc% is called contango c"arges)

:ya> Badla

• T"e transaction w"ere t"e lender w"o lends oney to t"e #orrower t"roug" t"e clearing"ouse of

t"e Bo#ay $toc% E&c"ange is called :ya> Badla)

• T"e lender ta%es u' t"e deli!ery of t"e s"ares fro t"e original #uyer at a standard rate .a!erage or

"awala rate/ and sells t"e sae in t"e ne&t settleent #ac% to "i at a standard rate 'lus finance

c"arge, to 'ay for t"e stoc% for t"at 'articular 'eriod)

• :ya> Badla is not s'eculation since t"e financier or t"e in!estor is not ta%ing any in!estent

'osition in t"e ar%et)

• His role is t"at of a financier and "e ste's into t"e s"oes of t"e #uyer only for funding t"e deli!ery

at a 're-deterined rate)

BADLA SYSTEM IN INDIAN STOCK MARKET

In India, #adla syste was allowed for s'eculation in s"ares wit"out 'aying u' t"e full cost of t"e

transaction)

T"e ter #adla@ refers to t"at syste w"ere#y t"e #uyer or seller of s"ares ay #e allowed to 'ost'one

'ayent of oney, or deli!ery of t"e s"ares, as t"e case ay #e, in return for 'aying or recei!ing a certain

aount of oney)

It is oftenly also %nown as carry forward trading) Badla can #e classified in to two ty'es naely #adla@

.or contango/ and ulta@ or und"a #adla .or #ac%wardation/)

T"e following e&a'le will e&'lain t"e syste of #adla trading

Example ! "a#la:



On 3arc" 2, #uys a state #an% of India .$BI/ s"are for Rs)2<< and "e is re(uired to 'ay Rs)2<,<<< for

0<< s"ares on t"e settleent day, i)e) 0 3arc" to ta%e t"e deli!ery)

Assuing t"at t"e 'rice of t"e s"are is still Rs)2<< on t"at day, instead of 'aying of Rs)2<,<<<, "e infors

"is #ro%er t"at "e would li%e to carry forward t"e transaction to t"e ne&t settleent 'eriod ending on 2<

3arc")

T"en t"e #ro%er locates t"e ot"er 'arty .seller/ w"o is also willing to carry forward t"e transaction, i)e)

w"o does not insist t"e 'ayent of t"e s"ares aount on 0 arc")

In return for agreeing to 'ost'one t"e recei't of oney for 0 arc" to 2< 3arc", t"e seller i'oses a

c"arge on t"e #uyer, w"ic" is 'o'ularly %nown as #adla@) It eans it is a c"arge in for of interest for t"e

'ost'oneent of t"e 'ayent for t"e 'eriod fro one settleent to t"e ne&t settleent)

Assuing t"e 'rice of $BI s"are Rs)2<< and a #adla rate 4 'ercent 'er ont", , t"erefore, will 'ay to

seller Rs .4&2<<6&0<</ 'er s"are, #eing t"e #adla c"arge for 09 days ."alf a ont"/)

If t"e ar%et 'rice of t"e $BI s"are c"anges on 0 arc" for e&a'le, if it is Rs)209 t"en t"e seller is to

ad>ust and settle t"is transaction as follows "as to 'ay #adla c"arges F4 'ercent 'er ont" for a 'eriod

of 09 days, i)e) )2<.4&2096&0<</ 'er s"are #eing total Rs)2<.0<<&)2</)

$e'arately, t"e seller "as to 'ay to t"e a''reciation in t"e s"are 'rice, i)e) Rs)09) T"e net aount of

Rs)G);<.09-)2</ 'er s"are will #e 'aid #y t"e seller, #eing total Rs)G;< to t"e #uyer) In t"is way, is

allowed to 'ost'one .i)e), carry forward/ 'ayent till t"e ne&t settleent date)

$iilarly, if t"e s"are 'rice "as decreased, i)e), fro Rs)2<< to 61<, t"en t"e #uyer "as to 'ay #adla

c"arges, i)e), Rs)9)G<.61<&46&0<</ and Rs)0<.difference of Rs)2<<-61</, #eing Rs)09)G< 'er s"are,

totaling Rs)09G< in order to carry forward)

Ul$a % U&#'a "a#la:

$oeties, t"ere are certain cases w"ere t"e sellers of t"e s"ares ay as% for 'ost'oning t"e deli!ery of

t"e s"ares w"ic" ay occur due to !arious reasons, e)g) nu#er of carry forward sellers as a w"ole

significantly e&ceeds t"e nu#er of #uyers on carry forward #asis)

In suc" situation, t"e #ro%ers would face situation of lac% of floating s"ares and will 'ersuade to soe

#uyers to 'ost'one t"e settleent to t"e ne&t one)

Alternati!ely, t"ey would find scri' lender w"o lend s"ares) T"us, t"e c"arge 'aid #y t"e seller in suc"

case to t"e #uyer is %nown as ulta@ or und"a #adla@ or #ac%wardation@ c"arges)



Example:

Continuing t"e earlier stated e&a'le, let us assue t"at t"e 'arty ? is t"e seller w"o is e&'ecting t"e

'rice of t"e $BI to fall #elow Rs)2<< 'er s"are #y t"e settleent date) Assue t"at t"e 'rice reains

unc"anged on settleent date, i)e), arc" 0) Howe!er, ? feels t"at it will fall later, and "ence, wis"es to

carry forward t"e transaction to t"e ne&t settleent date) In suc" situation, soeties, t"e seller "as to

'ay c"arges to t"e #uyer for suc" 'ost'oneent, w"ic" is %nown as und"a #adla or #ac%wardation

c"arges)

BADLA PROCEDURE

Badla trading in!ol!ed #uying stoc%s wit" #orrowed oney wit" t"e stoc% e&c"ange acting as an

interediary at an interest rate deterined #y t"e deand for t"e underlying stoc% and a aturity not

greater t"an ;< days)

8i%e a traditional futures contract, #adla is a for of le!erage unli%e futures, t"e #ro%er-not t"e #uyer or

seller-is res'onsi#le for t"e aintenance of t"e ar%ed-to-ar%et argin)

Example

T"e ec"anis of #adla finance can #e e&'lained as follows

o $u''ose A "as to #uy 0<< s"ares of a co'any at Rs 9< eac") But "e doesnt "a!e enoug" oney

now)

o But t"e !alue of s"ares is !ery less now, so in order to #uy t"e s"ares at current 'rices, A can do a

#adla transaction)

o Now t"ere is a #adla financier B w"o "as enoug" oney to 'urc"ase t"e s"ares, so on As re(uest,

B 'urc"ases t"e s"ares and gi!es t"e oney to "is #ro%er)

o T"e #ro%er gi!es t"e oney to e&c"ange and t"e s"ares are transferred to B) But t"e e&c"ange

%ee's t"e s"ares wit" itself on #e"alf of B)

o Now, say one ont" later, w"en A "as enoug" oney, "e gi!es t"is oney to B and ta%es t"e

s"ares)

o T"e oney t"at A gi!es to B is slig"tly "ig"er t"an t"e total !alue of t"e s"ares)

o T"is difference #etween t"e two !alues is t"e interest as #adla finance is treated as a loan fro B

to A)

o T"e rate of interest is decided #y t"e e&c"ange and it c"anges fro tie to tie



HOW IS BADLA DONE?

T"e Badla session is "eld e!ery $aturday in 3u#ai, Del"i and A"eda#ad and on T"ursday at t"e

Calcutta $toc% E&c"ange)

T"e scri' in w"ic" t"ere are outstanding 'ositions is listed along wit" t"e (uantities outstanding)

De'ending on t"e deand and su''ly of oney, t"e carry forward rates are deterined)

If t"e ar%et is o!er#oug"t, t"e deand for funds is ore and t"e #adla rates tend to #e "ig" and it results

in :ya> #adla

Howe!er, w"en t"e ar%et is o!ersold, t"e #adla rates are low or w"en in a 'articular stoc% t"e s"ort

'osition is ore, t"e Und"a #adla a''lies)

HOW DOES IT WORK IN REAL LIFE?

$u''ose you 'urc"ase 0< s"ares of Reliance Power for Rs) 2<<<, and at t"e end of t"e day, t"e stoc%

closes at Rs)22<<)



?ou s'eculate t"at t"is Reliance 'ower s"are 'rice will go e!en furt"er u' and you can a%e a "andsoe

'rofit out of t"is) But you don@t "a!e t"e oney to 'ay to t"e #ro%er and ta%e deli!ery of t"ese s"ares

To sol!e t"is 'ro#le, you enter into a #adla transaction, so your #ro%er will carry out t"e oney 'ayent

on your #e"alf) ?ou@!e to %ee' 'aying "i t"e interest rate for it .as long as you "old@ t"ese s"ares and

do not sell t"e to soeone else/)

Badla transactions are settled on $aturday session eac" wee%)

T"e interest rate on Badla transaction is deterined #y ar%et forces of su''ly and deand)

i)e) if lot 'eo'le entering into Badla contract t"at eans oney is in "ig" deand J Interest rate on Badla

increases) If #ro%er #elie!es t"at &y+ s"are 'rices will go really "ig" t"en "e@ll deand ore interest for

financing it #ecause t"e custoer will #e a%ing #ig 'rofit)

In Englis" t"is is called KCarry forward transactionL #ecause you@re carrying forward t"e 'ayent date

for t"ose s"ares you@!e 'urc"ased)

BADLA FINANCIN(: A WAY TO WEALTH OR PO)ERTY?

H* # $'e !+&a&,+e%- ma.e m&e/?

Once t"e day@s trading is o!er, t"e #ro%ers list out t"eir 'ositions w"ere t"ey are assured of ta%inga%ingdeli!eries as Kfor deli!eryL 'ositions)

T"is "el's t"e e&c"ange calculate t"e net outstanding 'ositions as on =riday e!ening .t"e final day of

settleent on B$E/ #y su#tracting t"e for t"e #ro%ers ouststandings for t"e wee%)

T"is difference is t"en traded on B$Es #adla trading session, conducted on $aturday) Before t"e session,

t"e #ase 'rice ."awala 'rice/ is set, w"ic" is usually t"e last closing stoc% 'rice)

An undeli!ered M#uyM 'osition in scri' is %nown as a seed"a #adla in w"ic" t"e financers ta%e 'art, w"ilean unfulfilled MsellM 'osition in t"e scri' is %nown as an ulta or und"a #adla in w"ic" t"e stoc% lenders

ta%e 'art)

$'ecific aounts of s"ares a!aila#le are 'urc"ased and sold at t"e financiers e&'ected interest rate .#adla

rate/) T"is interest is t"e financiers@ incoe)

W'a$ a%e +$- "e&e!+$-?



T"e sole #enefit is "ig" returns of 64 in t"e rising ar%et)

W'a$ a%e $'e %+-.-?

T"e disad!antages are any

Returns less t"an G in t"e falling ar%et

Hig" #ro%erage .6)9 a&iu/ can reduce your returns,

8oss of 'rinci'al due to default #y #ro%erforward #uyer and

8ac% of stoc% selection, since t"e #ro%ers decide w"ic" stoc% to c"oose, 'utting your oney at t"eir

ercy)

PROBLEMS

As you can see, any one wit"out sufficient oney can enter in t"is s'eculating gae as long as "e "as

soe oney to 'ay interest rates on Badla transactions) And if luc% fa!ors "i, "e can wal% away wit" a

decent 'rofit)

$o lot of 'eo'le doing s'eculati!e s"are-trading li%e t"is J s'eculation !olatility)

But it ay "a''en t"at s"are 'rices don@t wor% out as t"ey "ad s'eculated and t"en t"ey refuse to 'ay

oney or go #an%ru't or suicide J not good for econoy)

After 16s Hars"a 3e"ta sca, #adla syste was #anned in t"e county for a w"ile)

As suc" Balda is not #ad #ecause it allows you to arrange oney)

And it also allows t"e #ro%ers-financiers to lend you oney and earn interest on it)

Pitfalls in Badla syste are sae as in o!ers'ending wit" credit card or #uying way too uc" stuff on

loans to an e&tend w"ere ;< of your ont"ly salary goes in E3I 'ayents)

BADLA MECHANISM

Mea&+&0

Φ A syste of stoc% e&c"ange trading t"at allows t"e facility of carry forward of t"e transaction for t"e

'ur'ose of clearing, fro one settleent 'eriod to anot"er is %nown as #adla syste@)



Φ Badla transactions can #e carried out only in res'ect of s'ecified categories only)

Φ T"e syste allowed t"e #uyer not to a%e 'ayent of t"e entire aount at t"e tie of t"e 'urc"ase

against t"e security of #lan% transfer deed and s"are certificates)

Φ Badla rates were fi&ed on fortnig"tly #asis de'ending on t"e deand and su''ly conditions)

Me,'a&+-m

Badla syste in!ol!es t"e following ec"anis

0) Transfer of ar%et 'osition

6) $toc%-lendings"ort-selling

2) Borrowinglending in oney ar%et

1 T%a&-!e% ! ma%.e$ p-+$+&:

→ In t"e e!ent of t"e in!estor, of t"e #uyer or t"e seller, not #eing in a 'osition to settle t"e transaction at t"e

end of a settleent 'eriod eit"er #y a 'ayent or a recei't or ta%e deli!ery or gi!e deli!ery)



→ It is 'ossi#le to transfer t"e 'osition #y carrying forward t"e transaction fro one settleent 'eriod #y

carrying forward t"e transaction fro one settleent 'eriod to anot"er #y re!ersing t"e transaction)

→ T"e transfer 'osition !aries de'ending on t"e ty'e of o'erator)

a F% "ll pe%a$%:

o In t"e case of a #ull o'erator, w"o is su''osed to a%e 'urc"ase of securities #ut not #eing in a

'osition to do so, "e can carry forward "is 'urc"ase 'osition to t"e ne&t settleent)

o T"is "a''ens #y re!ersing "is 'urc"ase 'osition in t"e current settleent, w"ic" i'lies t"at "e

"as to enter in to a sale transaction at t"e a%e -u' 'rice fi&ed #y t"e stoc% e&c"ange)

o T"e a%ing-u' 'rice is generally t"e closing (uotation of t"e s"are in t"e current settleent)

o He is t"us, allowed to 'ay or recei!e t"e difference #etween t"e contract 'rice and t"is #rings to an

end "is earlier coitent and a new contract will t"us #e #orn)

A fres" 'urc"ase 'osition is t"us created w"ic" will #e !alid for t"e ne&t settleent) $uc" a 'osition is

created in t"e e&'ectation of a rise in 'rice in t"e ne&t settleent) =or a!ailing t"is facility of carry

forward, t"e #ull o'erator "as to 'ay a c"arge %nown as contango@ to t"e financiers)

" F% "ea% pe%a$%:

⇒ In t"e case of #ear o'erator, w"o is su''osed to a%e sale of securities #ut not #eing in a 'osition

to do so, it is 'ossi#le to carry forward t"e sale 'osition to t"e ne&t settleent)

⇒ T"is "a''ens #y re!ersing t"e sales 'osition in t"e current settleent, w"ic" i'lies t"at a

'urc"ase transaction "as to #e entered in to t"e a%e-u' 'rice fi&ed #y t"e stoc% e&c"ange)

⇒ T"e a%e-u' 'rice is generally t"e closing (uotation of t"e s"are in t"e current settleent)

⇒ He is t"us allowed to recei!e or 'ay t"e difference #etween t"e contract 'rice and t"is #rings to an

end "is earlier coitent and a new contract will t"us #e #orn)

A fres" sale 'osition is t"us created w"ic" will #e !alid for t"e ne&t settleent) $uc" a 'osition is created

in t"e e&'ectation of a fall in 'rice in t"e ne&t settleent) =or a!ailing t"is facility of carry forward, t"e

#ear o'erator "as to 'ay a c"arge %nown as #ac%wardation to t"e financiers)



2 S$,.3le&#+&04-'%$3-ell+&0:

T"e facility, #y w"ic" it is 'ossi#le for an o'erator to sell a security wit"out actually owning it, is called

stoc%-lending@ or s"ort selling)

Badla transactions facilitate stoc%-lending for s"ort-sellers and t"us 'ro!iding for "ig"er in!estent)

In a falling ar%et, t"e s"ort-sellers "a!e to 'urc"ase to co!er t"eir sales 'osition)

T"is acti!ity c"ec%s a fall in security 'rices) $iilarly in a rising ar%et t"ose w"o "a!e contracted to

'urc"ase, "a!e to sell securities to s(uare t"eir 'osition, t"us arresting furt"er rise in s"are 'rices

5 B%%*+&04le&#+&0 +& m&e/ ma%.e$:

Under securities wit" an a''ro!ed interediary under an agreeent for a s'ecified 'eriod)

T"e agreeent will 'ro!ide for t"e continuance of t"e #eneficial interest including t"e cor'orate #enefits

wit" t"e lender)

=or t"is 'ur'ose, t"e $EBI "as conditioned t"at a''ro!ed interediary s"all "a!e a iniu net wort" of

Rs) 9< crores)

T"e stoc%-lending sc"ee, also called t"e securities lending sc"ee@, was introduced #y $EBI in 011;,

on t"e recoendations of B)D) s"a" coittee.

THE USE BADLA TO LE)ERA(E ONE6S POSITIONS?

T"e conce't of #adla can #e wor%s as follows $u''ose you 'urc"ase 0<< s"ares of HD=C Ban% for

Rs69< and t"e stoc% closes at Rs6< at t"e end of t"e trading session)

?ou feel t"at t"e stoc% "as 'otential to rise furt"er in t"e coing days and you would li%e to "old t"e

s"ares, "owe!er you do not "a!e funds to 'ay t"e 'rice and ta%e deli!ery)

T"e way out is to enter into a #adla transaction, w"ic" your #ro%er will carry out on your #e"alf)

T"us on $aturday during t"e #adla session t"e ar%et will arri!e at a rate at w"ic" t"e financiers are

willing to lend you funds to carry forward your HD=C Ban% 'osition)



T"e funds t"at t"e financier su''lies will #e 'assed on t"e seller w"o is not aware t"at t"e s"ares "e "as

sold in t"e ar%et "a!e not #een deli!ered #ut are outstanding)

In any #adla transaction t"ere are two %ey eleents naely t"e "awala rate and t"e #adla c"arge for t"e

scri')

T"e #adla c"arge is t"e interest 'aya#le #y t"e in!estor for carrying forward t"e 'osition)

T"e #adla c"arge, as e&'lained earlier is ar%et deterined)

It is fi&ed indi!idually for eac" scri' #y t"e ar%et e!ery $aturday and it is calculated on t"e "awala rate)

T"e "awala rate is t"e 'rice at w"ic" a s"are is s(uared u' in t"e current settleent and carried forward

into t"e ne&t settleent in t"e ne&t trading session ."awala entry is a%in to a >ournal entry 'assed in

dou#le entry syste of accounting/)

T"e e&isting 'osition you "a!e is s(uared u' against t"e "awala rate fi&ed and carried forward after

factoring in t"e #adla rate)

If t"e stoc% w"ere you "a!e decided to carry forward your 'osition .eit"er long or s"ort/ is !ery "ig" you

end u' 'aying "ig" #adla c"arge conse(uently if t"e deand is low t"e #adla rates are low)

$ay t"e 0<< s"ares of HD=C Ban% t"at you "ad 'urc"ased at Rs69< in t"e current settleent, w"ic" you

now wis" to, carry forward to t"e ne&t settleent)

T"e "awala rate is fi&ed at Rs6< and t"e #adla rate is fi&ed at Rs)<)G9 for t"e settleent, w"ic" is usually

a wee%)

T"e #adla c"arge wor%s out to an annuali+ed rate of 0;, #ut t"e #adla is usually denoted in actual cas"

ters)

?our 'urc"ase rate 69<)<< Hawala rate 6<)<< Difference 0<)<< Add Badla c"arge <)G9 Carried forward

rate 6<)G9 .Accrues to t"e in!estor in t"is case) If t"e Hawala rate is lower t"an t"e initial rate, t"e

difference "as to #e 'aid to t"e #ro%er/)

In actual 'ractice your #ro%er will re(uest you to aintain a argin for arranging t"e #adla finance)

T"ere can #e ot"er c"arges too and it ay !ary fro #ro%er to #ro%er)

All t"e c"arges a'art fro t"e #adla c"arges de'end on your relations"i' wit" your #ro%er)

T"e aount of le!erage you get effecti!ely de'ends on t"e argin insisted u'on #y your #ro%er)



If your #ro%er insists on a 6< argin you get a 9<< le!erage or fi!e ties t"e aount you are ready to

de'osit as argin)

At t"e end of eac" settleent you carry forward your 'osition at t"e "awala rate and it is ad>usted for

#adla)

?ou can carry forward t"e transactions for settleents)

=or t"e lay in!estor, #adla offers anot"er o''ortunity for in!estent - as a #adla financier)

T"is sc"ee offers an annual return of close to 0G to 64 'er cent, w"ic" e!entually wor%s out to 0 and 66

'er cent after deducting #ro%erage)

As a #adla financier you 'ro!ide finance to t"e 'erson w"o wants to ta%e #adla)

As a #adla financier, you are not re(uired to ta%e any ris% of #ad deli!ery or forged and fa%e s"ares or for

'"ysical is"andling of s"ares)

No ta& is deducted at source for t"e interest you recei!e, and in ters of li(uidity you recei!e your oney

#ac% on t"e 00t" day fro t"e =riday of t"e wee% in w"ic" you infor your #ro%er) T"e s"ares against

w"ic" finance is gi!en are %e't in t"e custody of t"e clearing-"ouse of t"e E&c"ange)

LIMITATIONS

Howe!er, t"e ec"anis of #adla financing can #e a #it co'licated w"en #onus, rig"ts, di!idends are

declared or w"en #oo%s are closed)

T"erefore it is always ad!isa#le to understand t"e 'rocess fully #efore !enturing into t"is area)

It is eant for acti!e in!estors wit" a s'eculati!e #end of ind) T"is autoatically i'lies a certain

ca'acity to #ear losses)

DRAWBACKS

3ore t"an s'eculation, t"ere are a cou'le of t"ings t"at always #ot"ered lay in!estor a#out t"e way t"e

carry forward syste)

T"e ost worrying was t"e uncertainty a#out t"e interest .#adla/ rates, in addition to t"e uncertainty of

t"e s"are 'rice o!eent - es'ecially since t"ese a''eared to "a!e little correlation)



Badla rates !ary widely fro wee% to wee%, and e!en in t"e sae settleent)

If t"e in!estor %new a-'riori w"at t"e carry-forward rate would #e, t"en t"e in!estor could calculate t"e

ris%-reward e(uation uc" #etter)

3y second 'ro#le was t"e duration of t"e carry-forward)

One wee% is too s"ort for t"e in!estors li%ing)

=or instance, in todays de'ressed ar%et t"e in!estor ig"t #e willing to ta%e a call on Infosys or H88 si&

ont"s down t"e line, #ut one wee% is i'ossi#le)

Of course, t"is is #orn of y 'ersonal in!estent style, #ut t"e 'oint is t"at t"e instruents s"ould allow

for long .or s"ort/ 'ositions of !arying 'eriods)

In recent wee%s, we "a!e seen a #arrage of articles defending t"e #adla syste, and condening $EBIs

action in 'ro'osing to #an carry forwards)

T"oug" acadeics and e&'erts agree t"at deri!ati!es are t"e #est long-ter solution, ar%et-en

disagree)

T"eir arguents centre on t"e iediate i'act of t"e #an)

T"e cru& of t"e 'ro#le is t"at trading !olues will colla'se)

T"is will i'act not only traders, #ut also in!estors w"o will suffer due to 'oor li(uidity)

Needless to say, t"e worst affected will #e t"e financial counity .#ro%ers/ - w"ose #usiness will

dwindle considera#ly)

T"e unwinding of long 'ositions will also cause a near-ter cras" .already underway/)

$oe of t"e "a!e e!en gone on to critici+e futures and o'tions, saying t"ey are too co'le&, and will

ta%e a !ery long tie to catc" on)

In t"is conte&t, t"e lac% of 'o'ularity of inde& futures in India is cited as 'roof of t"eir unsuita#ility)

In!estors agree wit" t"e idea t"at s'eculation is a ust for "ealt"y ar%ets)

Howe!er, t"e syste ust #e trans'arent and fool-'roof, w"ic" #adla is not)

In t"e recent 'ast, o'erators "a!e succeeded in ani'ulating carry-forward 'ositions t"roug" internal

transactions)



T"e source of funding for #adla is ne!er clear, and uc" is de'endent on t"e a#ility of s'eculators to

arrange financing)

T"is could concei!a#ly coe fro t"eir own 'oc%ets, allowing t"e to ensure t"at interest rates are lower

t"an gains in any 'articular scri')

As for !olues, t"ey will #e definitely i'acted - #ut for all you %now, t"is could 'ro!ide a uc" needed

#oost to t"e B grou' stoc%s currently languis"ing for lac% of interest)

Ty'ically, since inclusion in t"e forward category is decided on t"e #asis of !olues alone and #y 'eo'le

.B$E e#ers/ w"o ig"t "a!e !ested interests, t"e syste encouraged ar%et o'erators)

T"e lac% of success of futures is not conclusi!e, as one could argue t"at t"ey "a!ent ta%en off #ecause t"e

financial counity "as a !ested interest in %ee'ing #adla ali!e)

T"e lac% of in!estor awareness a#out t"e new instruents is also not a !alid reason to delay o'tions, as

Indian traders are sart and will 'ic% u' t"e nuances (uic%ly enoug", es'ecially if t"ey "a!e no ot"er

o'tion .'un intended/)

To t"e in!estor t"e a>or issue rig"t now concerns $EBIs i'leentation tactics, w"ic" definitely lea!e

uc" to #e desired)

Rat"er t"an a #lan%et #an wit" alost no notice, a well-defined transition 'eriod would "a!e #een ore

a''ro'riate)

T"oug" #adla is slated to end ne&t ont", we still dont "a!e a clear tieta#le for introduction of o'tions)

Actually, t"is is w"ere $EBI s"ould #e far ore 'roacti!e and ensure t"at o'tions for "undreds of scri's

#ecoe a!aila#le, and (uic%ly)

Howe!er, ta%ing a long-ter !iew, one ust recognise t"at t"e switc" to deri!ati!es is ine!ita#le)

It is 'ro#a#ly #etter to do it now and get it o!er wit", t"an to 'ost'one t"e #irt" 'ains)

BADLA (ROSSLY MISUSED IN CAPITAL MARKETS

5PC Ca'ital ar%et e&'erts de'osing #efore t"e >oint 'arliaentary coittee 'ro#ing t"e stoc% sca

said on =riday t"at #adla syste as 'racticed in t"e country "as #een grossly isused leading to total

erosion of sall in!estors confidence)



Briefing newsen on =ridays 'roceedings, 5PC c"airan, $"ri'ra%as" 3ani Tri'at"i said two e&'erts, $

C 7u'ta and A>it Dey, forer Calcutta $toc% E&c"ange 'resident, felt t"e #adla syste .forward trading/

in India "ad a lot of sco'e for isuse, w"ic" t"e #ro%ers too% ad!antage of)

T"oug" t"e e&'erts !iew on w"et"er t"e Indian stoc% e&c"anges s"ould "a!e #adla syste or not was

di!ergent, t"ey were agreed on t"e total isuse leading to erosion of in!estors confidence 'articularlyt"at of sall in!estors, "e said)

T"e #adla syste was #anned in t"e country fro 0114 to011 after t"e 0116 ulti-#illion securities

sca .Hars"ad 3e"ta/)

It was reintroduced after D R 3e"ta too% o!er as $e#i c"airan) It is now #eing #anned fro 5uly 6<<0

in t"e face of t"e recent stoc% sca)

Banning of #adla syste, no dou#t, reduces t"e !olatility of t"e ca'ital ar%ets, #ut at t"e sae tie itgrossly reduced t"e !olue of t"e trading, Tri'at"i (uoted t"e e&'erts as saying)

T"e e&'erts were also critical of $e#i for not #eing alert and felt t"e ar%et regulator "ad failed to ta%e

tiely action to 're!ent t"e stoc% sca)

MODERN )ERSION TO REPLACE BADLA

T"e 3inistry of =inance "as indicated to t"e 5oint Parliaentary Coittee .5PC/ on t"e stoc% sca t"at

it would wor% out a 'eranent and refined carry-forward syste, instead of t"e earlier #adla syste

w"ic" "as #een #anned since 5uly 6)

=inance 3inistry officials infored us t"at t"ey "a!e "eld detailed discussions on t"e issue and t"at t"e

#adla syste would #e cur#ed in its original for and a ore odern syste would #e us"ered in,

C"airan, 5PC, 3r Pra%as" 3ani Tri'at"i, said on *ednesday)

Coe 5uly t"e conce't of #adla will no longer e&ist #ut will still reain, alt"oug" t"roug" a differentode t"at is ore regulated and trans'arent)

T"e two ost i'ortant as'ects of t"e new ar%et would #e rolling settleent and deri!ati!es)

Rolling $ettleent *it" rolling settleent in 'lace, in!estors cannot underta%e intra-settleent

s'eculation as t"ey "a!e to settle t"eir account at t"e end of eac" trading day)

T"is will in!aria#ly #ring down s'eculation in t"e s'ot ar%et)



T"erefore, li(uidity dries u')

COMPARISON BETWEEN BADLA AND FUTURE

BADLA FUTURES

E&'iration date unclear E&'iration date %nown

$'ot ar%et and different e&'iration dates are

i&ed u'

$'ot ar%et and different e&'iration dates all trade

distinct fro eac" ot"er)

Identity of counter'arty often %nown Clearing cor'oration is counter'art

Counter'arty ris% 'resent No counter'arty ris%

Badla financing is additional source of ris% No additional ris%



Badla financing contains default-ris% 'reia=inancing cost at close to ris%less t"an%s to

counter'arty guarantee

Asyetry #etween long and s"ort 8ong and s"ort are syetric

Position can #rea%down if #orrowinglending

'ro!es infeasi#le

?ou can "old till e&'iration date for sure, if you want

to



BSE MAY REINTRODUCE BADLA IN A NEW7 S8UEAKY CLEAN IMA(E

B? RA5E$H PANDATHI8 5U8 62, 6<06

T"e #attle for ar%et s"are is "otting u' in t"e stoc% ar%et s'ace)

*it" t"e 3C-$ getting clearance to start a stoc% e&c"ange, t"e Bo#ay $toc% E&c"ange, t"e oldest in

Asia, is di''ing into its ric" "istory to re'eat an earlier inforal syste t"at ena#led ar%et 'artici'ants

to delay deli!ery of securities for a fee)

T"e syste was called #adla and was widely used #efore t"e 011<s to carry forward trades)

Under t"is syste, a financier "el's a #uyer #uy a stoc%, #ut t"e #uyer defers ta%ing deli!ery of t"e

securities until "e "as cas" in "is "and)

T"e #uyer also 'ays an interest on t"e aount #orrowed fro t"e financier, w"ic" is a fee for t"e #adla

transaction)

Bot" #uyer and seller were allowed to use t"e #adla syste)

T"e syste #oosted s'eculation and li(uidity in t"e ar%et)

It functioned ore or less li%e futures and o'tions)

T"e syste et wit" a natural deat" after t"e National $toc% E&c"ange #ecae o'erational and 'eo'le

o!ed to t"e deri!ati!es segent, w"ic" offers ore 'rotection as it is under strict regulatory scrutiny)

According to a re'ort in Business Standard , t"e B$E is now 'lanning launc" a new deri!ati!e 'roduct

called cas" futures s'read .C=$/)

http://www.firstpost.com/author/rajesh

http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CAgQqQIwAA&url=http%3A%2F%2Fwww.business-standard.com%2Findia%2Fnews%2Fbadla-to-come-backbse-inrefined-avatar%2F481188%2F&ei=6AMNUMT_AsHsrAeO0fHHCA&usg=AFQjCNFDePEs2nX6w2NMSAecoHt3eNp1pA

http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CAgQqQIwAA&url=http%3A%2F%2Fwww.business-standard.com%2Findia%2Fnews%2Fbadla-to-come-backbse-inrefined-avatar%2F481188%2F&ei=6AMNUMT_AsHsrAeO0fHHCA&usg=AFQjCNFDePEs2nX6w2NMSAecoHt3eNp1pA

http://www.firstpost.com/author/rajesh



Unli%e #adla, w"ic" was not ade(uately onitored, t"e new 'roduct will #e less ris%y and ore

trans'arent, t"e re'ort said)

Bac%-roo financing will not #e 'eritted) In t"e #adla syste, t"is was one of t"e #iggest ris%s)

In t"e new 'roduct, a trader can enter cas" and future s'read trades in a single order)

T"e e&c"ange will 'ut out a 'rice (uote for t"e cas"-future s'read of a 'articular security)

T"ree cas"-future s'read will #e a!aila#le for trade at any gi!en tie in a security for t"e current, ne&t

and t"ird ont" futures)

At t"e settleent, t"e one w"o "as 'urc"ased t"e s"ares will get t"e stoc% at t"e agreed s'read and t"e

ot"er t"e interest)

In ot"er words, t"e s'read is cost of carry for one trader in t"e futures segent w"ile it is interest on

financing for anot"er trader)

C=$ is li%ely #oost "ealt"y s'eculation and i'ro!es li(uidity in t"e ar%et, Alo% C"uriwala, anaging

director of C"uriwala $ecurities, "as #een (uoted as saying in t"e re'ort)



CHAPTER NO: 5

CONCLUSION



CHAPTER NO: 5

CONC8U$ION

T"e greatest ad!antage of t"e #adla syste is t"at it allows for t"e e&'ansion in t"e ar%et si+e #esides

'ro!iding e&cellent li(uidity to t"e ar%et

T"e #iggest t"reat of t"e syste is t"at it encourages indless s'eculation leading to "ig" !olatility in

stoc% ar%et 'rices)

3ore t"an anyt"ing, it is i'ortant to note t"at, t"e ec"anis of #adla financing can #e a #it

co'licated w"en #onus, rig"ts, di!idends are declared or w"en #oo%s are closed)

T"erefore it is always ad!isa#le to understand t"e 'rocess fully #efore !enturing into t"is area)

It is eant for acti!e in!estors wit" a leaning towards s'eculation)

T"is autoatically i'lies a certain ca'acity to #ear losses)

After 16s Hars"a 3e"ta sca, #adla syste was #anned in t"e county for a w"ile)

After t"e %etan 'are%" sca in 6<<<, t"e N$E introduced futures contracts on t"e Nifty in t"e year 6<<<)

=inally #adla was #anned in t"e year 6<<<-<0



CHAPTER NO: 9

APPENDI



CHAPTER NO: 9

APPENDI

BIBLIO(RAPHY

=INANCIA8 DERI:ATI:E$ THEOR?, CONCEPT$ AND PROB8E3$

By $) 8) 7UPTA

WEBLIO(RAPHY

www)en)wi%i'edia)orgwi%iBadlaQ.stoc%Qtrading/

www)t"eanageentor)coEnlig"tenentorAreasfinance)))#adla)"t

www)window6india)co

badla mechanism

Documents

Transcript of badla mechanism