Forward trading in the Indian stock market was all along based on the badla system. Badla is an indigenous term used for the financing system in forward trading. In this system, stocks bought act as the security; and the seller, as well as the badla financier, get a share of the badla charges which are paid by the buyer. While a major section of the active traders in the market supported badla, the section that clamored for changes in the capital market blamed the badla system for all the problems in the Indian stock market.
Securities Exchange Board Of India (SEBI) and most of the experts from the government side recommended abolishing the badla system. This resulted in the introduction of rolling settlement and ban on badla.
Under the badla system, the buyer or seller could carry forward a transaction at the end of the settlement period by participating in badla. Under the rolling settlement, the buyer or seller has to square off the transaction the same day; otherwise, it will be treated as a delivery-based transaction. Along with introduction of rolling settlement, the authorities also introduced futures and options in the Indian stock market.
Since the badla system was in the market for so long and the was abruptly stopped, a majority of the traders in the market found it difficult to continue with the activity for two reason:
- They found there was no financing available to fund their speculative activity, and
- They were totally at a loss to the new system's option trading.
Badla and supporting systems are in the category of deferral products whereas options and futures are for hedging. At present there is no substitute for badla and the Indian market is totally new to hedging. The net result was drastic fall in volumes and prices in the Indian stock market.
Even though there are other reasons for the poor state of affaires in the capital market, the brokering community chose to harp on the badla issue for all problems. Brokers from various exchanges formed a national-level association of intermediaries in the industry called Securities India Association of India. Objectives of the association include promotion and protection of the interests of the members and to act as a think tank.
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