Badla System

Badla System – What’s This?

Badla System

• 'Badla' literally means 'something in return‘ and is the charge, the investor pays for carrying forward his position

• A Hedge tool, lets the investor take a position in a scrip without actually taking delivery of the stock

• ‘Badla’ system of transactions has been in practice for several decades in the Stock Exchange and Mumbai

What is Quasi-hedging and Stock lending?

Quasi-hedging and Stock lending

• Quasi-hedging:

If an investor feels that the price of a particular share is expected to go up or down, without giving or taking the delivery he can participate in the possible volatility of the share

• Stock lending:

If a stock lender wishes to short sell without owning the underlying security, he employs the Badla system and lends his stock for a charge

What is Financing mechanism?

Financing mechanism

• If investor wishes to buy share without paying the full consideration, the financier steps into the CF system and provides the finance to fund purchase.

• The scheme is known as "Vyaj Badla" or "Badla" financing.

• An investor can either take the services of a badla financier or can assume the role of a badla financier and lend either his money or securities.

How the Badla system works?

Badla System

On every Saturday, a CF system session is held at the BSE.

The scrips in which there are outstanding positions are listed along with the quantities outstanding

The CF rates are determined depending on the demand and supply of money.

the market is oversold the CF rates are low or even reverse i.e. there is a demand for stocks and the person who is ready to lend stocks gets a return for the same.

scrips in the Carry Forward list are all 'A' group scrips, which have a good dividend paying record, high liquidity and actively traded

The scrips are not specified in advance, as it then gets difficult to get maximum return

Badla System

• The Trade Guarantee Fund of BSE guarantees all transactions; hence, there is virtually no risk to the badla financier except for broker

• Even if the broker through whom you have invested money in badla financing defaults, the title of the shares would remain with you

• The shares would be lying with the "Clearing house

• However, the risk of volatility of the scrip will have to be borne by the investor

Remember: When the market is oversold the CF rates are low or even

reverse i.e. there is a demand for stocks and the person who is ready to lend stocks gets a return for the same

Thank You!

Twitter FacebookWebsite

Read More