Badla (stock trading)

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 were banned by the Securities and Exchange
Board of India (SEBI) in 1993, effective March 1994, amid complaints from foreign investors, with the
expectation that it would be replaced by a futures-and-options exchange.[1] Such an exchange was not
established and badla were legalized again in 1996 (with a carry-forward limit of Rs 200  million per
broker) and banned again on 2 July 2001, following the introduction of futures contracts in 2000.[2][3]

Procedure
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—why the buyer or seller—is responsible for the maintenance of the marked-to-market margin.[4]

Example

The mechanism of badla finance can be explained with the following example: Suppose A wants to buy
shares of a company but does not have enough money now. If A values the shares more than their current
price, A can do a badla transaction. Suppose 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. 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. The rate
of interest is decided by the exchange and it changes from time to time.

References
1. Alexander Balfour. February 1995. "Bogged-down in Bombay." Euromoney. Issue 310. p.
96.
2. C. Raja Rajeshwari. 28 January 2004. "From badla to derivatives (http://www.thehindubusin
essline.com/bl10/stories/2004012800260600.htm)." The Hindu Business Line.
3. Susan Thomas. 29 June 2001. "Ban on badla, take 2 (http://www.igidr.ac.in/~susant/MEDIA/
ban-on-badla-2.html) Archived (https://web.archive.org/web/20061125014139/http://www.igi
dr.ac.in/~susant/MEDIA/ban-on-badla-2.html) 25 November 2006 at the Wayback Machine."
Economic Times.
4. B. Venkatesh. 2001. "Badla versus futures (https://web.archive.org/web/20011101234139/htt
p://www.hinduonnet.com/businessline/iw/2001/05/06/stories/0706g151.htm)[Usurped!]." The
Hindu Business Line.
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