Tenth Anniversary Special
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Stock Markets
From badla to derivatives
C. Raja Rajeshwari
THE soaring volumes and the open position in the futures and options segment on the NSE (National Stock Exchange) are evidence to the successful transition from the age-old era of badla to futuristic derivatives. Badla, an indigenous carry-forward system, thrived as a facility for borrowing funds or shares, used mainly by speculators to take leveraged positions on the cash market. This leverage is the only similarity between badla and derivatives.
Badla was banned in 1993 as it provided non-transparent leverage and was of undue advantage to the short-seller. As a result, the volumes of A category of Bombay Stock Exchange suffered since badla was the only access to leverage then. This market, however, was the bastion of the brokers of the Bombay Stock Exchange (BSE); the Relentless lobbying by brokers for badla led to its resurrection in 1996.
Post-1996, badla existed in different avatars. In 1997, the modified badla system allowed hedging, and had a carry-forward limit of Rs 20 crore per broker. The NSE introduced the Automated Lending and Borrowing Mechanism (ALBM) followed by the BSE's Borrowing and Lending of Securities Scheme (BLESS), which were sophisticated forms of badla.The year 2000, however, was a watershed. The NSE introduced futures contracts on the Nifty. Though this universally-accepted leverage mechanism was available, it did not take off due to the existence of the badla.
The abuse of the facility in 2000-01 forced SEBI to ban badla. This move pushed the BSE and market makers also increasingly towards derivatives. The year saw the introduction of options on the index and equity options and futures on individual stocks.
The NSE changed the rules of the game in the spot and forward markets and now dominates the derivatives space also.
The BSE accounts for less than 5 per cent of the total derivatives trading volume. The derivatives turnover on the NSE is now about two-and-half times that of the spot market. SEBI's recent decision to introduce margin trading and securities lending would only fuel the growth of the derivatives market.
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