Unraveling the <i>'Badla'</i> - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Unraveling the 'Badla'

Oct 30, 1999

Suppose, you believe that with the Indian, Japanese and the Southeast economies showing distinct signs of recovery, regional trade is going to grow sharply. The quantity of freight is going to increase sharply and as a consequence, there is going to be a firming up of freight rates, particularly in the shipping sector. Furthermore, you believe that Indian shipping companies will turn in bumper profits in the coming quarter, as a fallout of this. To capitalise on the opportunity, you wish to take a large position in a domestic shipping company. But there is a catch. You do not have the money to invest in a shipping stock, say for example, Great Eastern Shipping (Gesco).

However, you need not worry. The Indian bourses (the Bombay Stock Exchange (BSE) in this case) offer facilities to investors to capitalise on these opportunities. It gives them an opportunity to either go long (purchase) or go short (sell) in a stock over a period that goes beyond just one settlement.

A long purchase implies having bought a stock, which has a positive outlook, without having paid for it, with the intention of squaring off the deal at a profit in the future. The momentum investor can do this by selling off his outstanding position at a higher price. A short sell on the other hand is aimed at capitalising on the pessimism prevailing in the market (or the stock in particular) by selling shares, without actually possessing them. The momentum investor in this case is looking forward to square off the deal by purchasing back the shares sold, at a lower price.

This system is popularly referred to as badla. There are certain rules and regulations that have to be complied with while doing badla. Some important ones are enumerated below:

  • Badla can be done in only A group shares on the BSE.

  • A badla trade has to be necessarily squared off within 90 days of entering into such a trade.

  • Margin money of 15%, both on long and short positions, (sometimes set arbitrarily for some stocks) will have to be maintained on a daily basis with the broker.

  • The outstanding position will be carried forward to the next settlement at a 'badla rate' (financing cost), mutually determined by the borrower and financier. The badla rate will be payable on the making up price (or Hawala rate, nearly equal to the closing price of the stock at the end of the settlement).

Take for example a momentum investor has gone long on 100 shares of Gesco.

At the end of the settlement the BSE will publish the details regarding carry forward, which in this case are:

As the margin in this stock has been set at 20%, the investor will have to keep a margin of Rs 4.75 per share with the broker. The special making up price indicates the net outstanding position (per share) at the end of the settlement.

The investor will then have to finance his position (equal to the hawala/making up rate) at a special badla session that is held after the close of the settlement. In this case, one will have to pay financing charges (vyaj badla) on Rs 2,300 (23*100) for the period until the next badla session. The deal then gets carried forward to the next settlement.

In this way, an investment of just Rs 475 (4.75*100) let's you take on a position of Rs 2,300. And if by the end of the next settlement the increase in the value of the investment is greater than the financing cost that has been paid, then you make a profit. However, in the opposite case, your losses are deepened, as you suffer erosion in value and also pay financing costs.

On the other hand, if one has gone short, then one would have to pay charges to borrow stock (share badla).

Sometimes, it may happen that there are a large number of short sellers in the market and the person who has gone long actually demands delivery. This means that the investor holding the long position decides to take delivery and pay up for the same. If the short sellers are unable to find a person to lend stock (share badla) then they will be faced with a possibility of default. This is called a bear trap. The short sellers will then have to pay the investors, who have gone long, so that they desist from taking delivery. The charge so levied is called 'undha badla' and is an uncommon feature in the markets.

The gross carry forward positions on the BSE were in excess of Rs 35 bn at the end of the settlement that ended on 22nd October 1999. This underscores the importance of the system to the stock markets. However, it must be said that trading on the badla account is like a double edged sword - it maximises profits and deepens the losses.

Equitymaster requests your view! Post a comment on "Unraveling the 'Badla'". Click here!


More Views on News

Ride the Indian Real Estate Revival with this 'Different' Smallcap Stock (Profit Hunter)

Mar 23, 2021

Affordability in the housing segment has never been so good in last one and a half decade. Here's how you could make the most of it...

My Latest Stock Recommendation (Fast Profits Daily)

Oct 9, 2020

How I picked an exciting stock using trends from both the commodity and equity markets.

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

Apr 29, 2020

Ajit Dayal on how the mutual fund industry robs you of your wealth.

This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

Oct 16, 2019

If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

More Views on News

Most Popular

My Recent Recommendation Will Profit from the Global Supply Chain Crisis (Profit Hunter)

Mar 31, 2021

A tiny chemical company, started in the Licence Raj era, is a great example of a new wealth creating opportunity.

My Stock Trading Strategy (Fast Profits Daily)

Mar 31, 2021

In this video I'll show you exactly how I go about picking stocks for trading.

4 Stocks to Make Your Portfolio Immune to the Second Covid Wave (Profit Hunter)

Apr 6, 2021

Rather than predicting the market, successful investing is more about preparing well and placing your bets accordingly.

If the Market Falls, I Will Do This... (Fast Profits Daily)

Apr 1, 2021

What should you do if the market falls? In this video, I'll tell you what I will do.

India: Recovery Stalled by Vaccine Games? (The Honest Truth)

Apr 13, 2021

Ajit Dayal on how India's vaccine strategy will impact the markets.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms