The badla system, which allowed transactions to be carried forward from one trading valan to the next, was banned by the SEBI in March SEBI was hoping. Q Is “badla” trading like derivatives trading? A: No. Badla is a mechanism to avoid the discipline of a spot market; to do trades on the spot market but not. the historical background to the introduction of badla in the Indian stock market, it is clear that this uniquely Indian system of forward trading in.

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Badla trading was evolved to take leverage positions in the share market.

Tradiing, Jul 31 It is being reported that BSE Ltd, in order to compete for volumes in the exchange market, is preparing to launch a product that will allow traders to take advantage of the spread between cash and futures market.

Though some reports claim that the product is similar to badla trading because of some common features, badla trading was a different practice in many ways. Badla basically means tradiing you get in return.


Badla (stock trading) – Wikipedia

In the complete absence of a derivatives market in India, badla trading was evolved to take leverage positions in the hrading market. The lenders in this case used to get an interest payout. For example, if a trader wanted to buy shares of company X priced at Rs each, he would have needed Rs 20, for the transaction.

However, under badla trading, the investors would ask the broker to find a financer to finance this trade and shares were bought. But the investor was supposed to pay the financer within a specified time.

The trades were carried through stock exchanges and shares were only transferred in the name of the end investor once the payment was settled. It was basically a leveraged trade. Was badla different from futures? Badla, as commonly understood, was not like traving futures contract or a forward contract.

It was simply a cash market transaction with borrowed funds. Normally, cash and futures markets are entirely separate, but there was no such distinction under badla trading.

Futures have a strict expiry date when the trade has to be settled and that was not the case when badla trading was prevalent. Also, counterparty risk was much higher in badla trading, while futures, listed on stock exchanges, carry no such risk.


Badla System: A Reappraisal

Badla led to some unintended and undesirable consequences and after much heat and dust, was finally banned in by the capital markets regulator, Securities and Exchange Board of India. Meanwhile, meaningful steps were taken to develop a derivatives market on stocks in the s.

Regulatory framework was evolved and necessary amendments in law were carried out in order to create the necessary condition to introduce derivatives trading. The establishment of National Stock Exchange in was vital in this direction.

Finally, trading in the derivatives segment was introduced in With the introduction of derivatives in the stock market, the need for badla was anyway over as investors and traders could now take leveraged positions in a much more efficient and transparent manner.