Concept of ‘Badla’

What is Badla

Badla is a mechanism to carry forward a speculative trade. It is also known as the Carry Over Transaction (COT).

Badla Finance in simple terms means putting money on interest. The mechanism is very easy for the stockbroking society but complex for the ordinary investor. History says Badla was born in the nineteenth century. Then, till today, the purpose has remained the same, the mechanism has hardly changed but the process has. These changes have made Badla Finance safer, more secure and transparent to clients besides a fair business practice for the stockbrokers

Machanism of Badla

A person buys shares with the intention to make profits but without blocking money. The purchase at the end of the settlement is carried forward to the next settlement. Here is where the client / Badla financiers steps in. The financier's block the money for taking delivery of shares purchased by the speculators. He gives the money to the exchange for shares bought. For this facility the speculator pays interest to the financiers. This interest is known as Badla.

Badla financing is done through stockbrokers

The financier gives money to his broker who in turn, hands over the same to the Exchange. The shares are retained by the Exchange under custody, on behalf of the broker's client. Since the shares and the money lie with the Exchange, broker's risk is also eliminated.
Example: If "A" has purchased 1000 shares of MCB @ Rs. 50 per share in Settlement 1, he has to take delivery from "B" who has sold the same. "A" would like to carry forward his position to the next settlement by letting "C" (Badla Financier) take delivery at the prevailing interest rate.

In settlement 2 "A" will have to purchase the shares at a higher badla rate as determined by the Exchange. If the Badla was Rs. 0.20 in settlement no.1, "A" will have to buy MCB @ Rs. 50.20 per share from "C".

The difference in purchase price in settlement no.1, and sale price in settlement no.2, is the earning for the Badla Financier.