What is Carry-Forward
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
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'
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
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
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
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
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
What is the depth of the
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
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.