Badla was allowed in the specified group of shares of BSE. This specified group was also known as the forward group as one could buy or sell shares in it without physical delivery. The carry forward session (badla session) was held on every Saturday at BSE.
A contract for current settlement could be executed in any of the following three ways.
1) Delivery against a sale contract given and delivery against a purchase contract received, and payment received / made at the contract rate.
2) Squaring off of transactions wherein a reverse transaction of either buying or selling of shares squared up with the earlier outstanding position and the difference in prices settled.
3) A contract in respect of which delivery was given or taken and which was not offset by an opposite transaction during the settlement period, could be carried forward to the next settlement period at the making up price, that is, the closing quotation on the last trading day and the different between the contract rate and the making up price settled. This postponement of the delivery of or payment for the purchase of securities from one settlement period to another was referred to as carry forward.
Badla involved four parties: the long buyer – a buy position in a stock without the capacity to take delivery of the same, the short seller – a sell position without having the delivery in hand, the financier, and the stock lender.
If the quantum of delivery sales exceeded the quantum of delivery purchases, financiers known as ‘Vyaj badlawala’ came forward to assist in completing the deal, took delivery in the current settlement, made the delivery in the next settlement to the buyers and, by doing so, helped in carrying forward the transaction. The difference between the current settlement rate and the sale rate for the next settlement which they received was the interest charges known as ‘seedha badla’ and the transaction was known as ‘Vyaj’ or ‘mandi badla’.
If the quantum of delivery purchases exceeded the quantum of delivery sales, share financiers known as ‘teji badlawala’ would give delivery in the current settlement to the buyers at the settlement rate and take the delivery back in the next settlement from the seller at lower sale rates. The difference between the two rates earned by them was known as ‘backwardation’ or ‘ulta badla’ and the transaction was known as ‘mal badla’ or ‘teji badla’.
Badla charges were market determined and varied from scrip to scrip and from settlement to settlement. Badla rates ranged from 15 per cent to 36 per cent on a yearly basis. SEBI banned badla charges for carry forward sales (short position) if the net carry forward buy (long) positions exceeded short positions. If the market was overbought (net long), there would be more demand for funds and the carry forward rates would be high; the reverse would be true when the market was oversold (net short). An oversold market would result in high demand for securities and the stock lender would get returns.
These transactions were completely hedged and stock exchanges guaranteed settlements and conducted auctions of shares in case of defaults. However, these guarantees were not available in unofficial or parallel badla markets which existed in Kolkata and Mumbai. Kolkata had a 90 percent unofficial badla market and as a result, it had to undergo a payment crisis in 2001.
Badla, or carry forward facility, was quite popular, accounting for nearly 90 percent of the trade at all stock exchanges.
The badla system contributed to the increase in the volume of the trading activity at BSE as it facilitated brokers to carry forward their positions and leverage. Moreover, as badla financiers were earning higher returns through this mechanism, they were lending a larger amount of funds, leading to an increase in trading activity. Badla, along with other factors such as increased network, boom periods, and increased participation by retail investors was instrumental in the increase of volume of trading activity form Rs 500 crore in 1991 – 92 to Rs 9,000 crore in 2000. Badla was also a vehicle of speculation. —