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BADLA

 What is Carry-Forward System?

In common parlance the Carry-Forward system is known as Badla, which means something in return. The Carry Forward system (Badla) of transactions has been in practice for several decades in the Stock Exchange, Mumbai. The Badla serves three needs of the stock market :

      It is a quasi-hedging mechanism: 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 fluctuation of the share.

     It is a stock lending mechanism: If he wishes to short sell without owning underlying security, the stock lender steps into the Badla and lends his stock for a charge.

        It is a financing mechanism: If he wishes to buy the share without paying the full consideration, the financier steps into the Badla and provides the finance to fund the purchase.

 What is 'Vyaj Badla'?

 In the Badla a position is carried forward, be it short sale or long purchase. However 'vyaj badla' is a 'badla' that is done without any sale or purchase position for investment in the market. The 'vyaj badla' financier enters into the system to lend money or shares for return. This is measured as interest on the funds made available for one settlement cycle, i.e. one week or a longer period in case of book closure Badla. Similarly 'undha badla' or contango charges are returns paid by stock borrower to stock lender.

 How is 'vyaj badla' done?

 On every Saturday in the Stock Exchange, Mumbai, a Badla session is held. The scrip in which there are outstanding positions is listed along with the quantities outstanding. Depending on the demand and supply of money,

To start with there is a standard rate and this rate is mostly the closing price of a particular script on the last working day i.e; Friday. If the market is over bought, there is more demand for funds and the BADLA rates tend to be high. However when the market is oversold the BADLA 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. The computer screen continuously show the yield, which is available at a particular rate. Depending on the amount you wish to invest the scrips and quantities are selected. The yield is calculated:

 

Standard Price : 300

Quoted Price : 300.30

 Then;                                  0.30*52 *100

                                               300                               

 What is Book Closure Badla? 

When the Company's books close (i.e., during Book Closures) there is No Delivery Period wherein there is no exchange of Delivery for about four weeks. The Carry Forward financier has to transfer the shares in his own name and re-deliver after transfer. The returns on Book Closure are hence higher than the average BADLA yield.

 

What security does he get against his money?

 He gets equivalent value of shares against the amount lent by him. The shares are kept in safe custody of the Clearing house, as stipulated by SEBI to retain the same until the 'vyaj badla' is released and investor wants his funds back. It is also possible to open a sub-account in investor's name in the Clearing House so that the shares remain in his name and the same cannot be misused. In fact it is not necessary to have the shares in his sub-account. He can exercise his lien based on the contract given by the broker.

 Is it necessary to select the scrips for the Carry Forward system? 

The scrips that have been put in the Carry Forward list are all 'A' group scrips which have a good dividend paying record, high liquidity and are actively traded. It is difficult to get the maximum return if the scrips are specified in advance, based on the demand and supply of money the scrips are to be selected for Carry Forward every week.

 What about margin, does an investor get margin?

 The margin is collected by the Exchange from the person who avails of the finance facility and it is kept with the Exchange. This is part of the risk control measures adopted by the Exchange. The 'Vyaj Badla' financier does not get any margin.

 How safe is the Clearing House?

 The Clearing House is managed by a company called BOI Share Holding, which is a subsidiary of Bank of India and The Stock Exchange, Mumbai. It has an insurance cover of Rs. 800 crores to make good any loss that occurs due to fire, fraud etc. Further the shares being in investor's sub-account are his property and he can operate the account on his own.

 What happens if the broker is declared defaulter?

 The Stock Exchange, Mumbai has a trade guarantee fund of Rs.306 crores (as on 31.3.98) which steps in if a broker defaults.

 What are the accounting entries to be passed ?

 Funding through 'vyaj badla' is by booking sale and purchase transactions simultaneously and the difference being the interest component. In the first settlement that an investor enter the system he has a purchase position, however in subsequent settlements he has a sale and so on till the last settlement wherein he would have a sale position.

 Is the yield guaranteed ?

 No the yield can not be guaranteed. In each settlement the yield depends on the demand for and supply of funds. However, it is seen that over a period of time i.e. 3 to 6 months 'vyaj badla' has definitely out-performed other available comparative avenues of investment.

 What is the depth of the market ?

 In every settlement the Carry Forward value was about Rs. 1,200 crores plus in March 1998 and it is increasing every settlement. Only the Stock Exchange, Mumbai offers the BADLA facility presently. The Stock Exchange, Mumbai is rapidly expanding its BOLT (BSE on line trading system) network nation wide and volumes are expected to increase.

 What is transaction charge ?

 Roughly brokerage charged by a broker is 1/8 to 1/10 of the interest earned by investor, this includes the cost of stamps that brokers have to affix on the contract note that they issue at the beginning of each settlement, the turnover charges to be paid to the Stock Exchange and other turnover linked charges that are paid to the Exchange like contribution to investors protection fund, insurance premium etc. This also goes to service the capital that is maintained by broker members for meeting enhanced capital adequacy norms.