Good riddance for the markets

Sachchidanand Shukla

The time has finally come to write an obituary of badla which had the broker-controlled stock markets in India in a virtual stranglehold. The broker lobby’s excuse of liquidity drying up in the absence of badla no longer holds water. Brokers have benefited most from the badla operation for it allows them to leverage funds without adequate securities to back them up. Yet the Securities and Exchange Board of India exists with the noble intention of “protecting the investor’s interest” and not for protecting brokers’ interests.

The world over liquidity has indeed dried up initially after the introduction of the rolling settlement mode. But eventually trading volumes have gone up by up to 40 per cent, considerably easing the liquidity problem.
Badla was first banned in 1969, but the ban had to be lifted shortly after. It was later banned, at the end of 1993, by GV Ramakrishna, then Sebi chairman. His successor SS Nadkarni too agreed to ban badla but the ban had to go two years later due to a hue and cry by brokers. Ironically, current chairman DR Mehta was instrumental in the decision.

Nowhere in the developed world does one come across a product like badla in the cash market. Theoretically, it is a quasi-futures product in a cash market. More importantly, it is a discriminatory and arbitrary product which is a major flaw from a regulator’s point of view.

Badla is allowed only in the specified list and is not available in the non-specified scrips or cash segment scrips. Why this discrimination? Either allow this carryforward in all scrips or scrap it for every segment. That will allow uniformity in the market system, imparting depth, and increase public confidence and participation.
We have an alarming history of stockmarket and financial scams. One of the prime reasons has been the cartelisation of exchanges by a few powerful brokers with access to products like badla whereby they can take huge exposures, risking the entire system, as is evident in the Ketan Parekh scam.

Anyway stock investing is not a cult here as it is in the United States. Only about 10 per cent of the population invests in stocks as compared to over 60 per cent in the US. The fact that Mumbai accounts for over 60 per cent of the total volumes says much about Sebi’s success in broadening the equity markets in nearly a decade of its existence.

Market capitalisation of listed stocks as a percentage of GDP is a useful indicator of the depth of equity markets. According to Bombay Stock Exchange data the average market cap was 49 per cent of GDP in March
2000 but has fallen to 25.6 per cent in March 2001, compared to developed countries where this ratio exceeds 100 per cent of GDP.