''Badla'' was an indigenous carry-forward system invented on the

Bombay Stock Exchange BSE Limited, also known as the Bombay Stock Exchange (BSE), is an Indian stock exchange based in Mumbai. It is the 6th largest stock exchange in the world by total market capitalization, exceeding $5 trillion in May 2024. Established with t ...

as a solution to the perpetual lack of

liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quic ...

in the

secondary market The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of ...

. ''Badla'' were banned by the

Securities and Exchange Board of India The Securities and Exchange Board of India (SEBI) is the Regulatory agency, regulatory body for securities and commodity market in India under the administrative domain of Ministry of Finance (India), Ministry of Finance within the Government ...

(SEBI) in 1993, effective March 1994, amid complaints from foreign investors, with the expectation that it would be replaced by a futures-and- options exchange.Alexander Balfour. February 1995. "Bogged-down in Bombay." ''Euromoney''. Issue 310. p. 96. Such an exchange was not established and ''badla'' were legalized again in 1996 (with a carry-forward limit of Rs 200 million per broker) and banned again on 2 July 2001, following the introduction of futures contracts in 2000.C. Raja Rajeshwari. 28 January 2004.
From badla to derivatives
" ''The Hindu Business Line''.Susan Thomas. 29 June 2001.

." ''Economic Times''.

Procedure

''Badla'' trading involved

buying Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market. Traders generally negotiate through a medium of cred ...

stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...

s with borrowed money with the

stock exchange A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for ...

acting as an

intermediary An intermediary, also known as a middleman or go-between, is defined differently by context. In law or diplomacy, an intermediary is a third-party beneficiary, third party who offers intermediation services between two parties. In trade or barte ...

at an

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

determined by the

demand In economics, demand is the quantity of a goods, good that consumers are willing and able to purchase at various prices during a given time. In economics "demand" for a commodity is not the same thing as "desire" for it. It refers to both the desi ...

for the underlying stock and a maturity not greater than 70 days. Like a traditional

futures contract In finance, a futures contract (sometimes called futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The item tr ...

, ''badla'' is a form of leverage; unlike futures, the broker—why the buyer or seller—is responsible for the maintenance of the marked-to-market margin.B. Venkatesh. 2001. "." ''The Hindu Business Line''.

Example

The mechanism of badla finance can be explained with the following example: Suppose A wants to buy shares of a company but does not have enough money now. If A values the shares more than their current price, A can do a badla transaction. Suppose there is a badla financier B who has enough money to purchase the shares, so on A's request, B purchases the shares and gives the money to his broker. The broker gives the money to exchange and the shares are transferred to B. But the exchange keeps the shares with itself on behalf of B. Now, say one month later, when A has enough money, he gives this money to B and takes the shares. The money that A gives to B is slightly higher than the total value of the shares. This difference between the two values is the interest as badla finance is treated as a loan from B to A. The rate of interest is decided by the exchange and it changes from time to time.

References

Economic history of India Bombay Stock Exchange {{India-econ-stub