`Futures trading in individual scrips, an indirect entry of badla'

By Our Special Correspondent

CHENNAI, MAY 8. The proposal before the Securities and Exchange Board of India for introducing individual securities-based futures is an attempt to ``bring back badla trading through the back door'', according to the former Chairman of SEBI, Mr. G.V. Ramakrishna.

Eighty per cent of securities futures trading in world markets is equity-based index futures, while many countries had even banned securities-based futures, Mr. Ramakrishna said, and pointed to the impossibility of marking to market thousands of scrips on a daily basis.

Speaking on the current crisis in the stock market at a meeting organised by the Triplicane Cultural Academy here on Sunday, Mr. Ramakrishna recalled his persevering efforts, during his tenure as Chairman of SEBI, to reform the Bombay Stock Exchange, which had been ``a club of brokers, by brokers, for brokers''.

Events and several committee reports had vindicated the stern measures taken by him amidst resistance by brokers starting from levy of registration fee and mandatory inclusion of public representatives to the extent of 50 per cent on the board of stock exchanges to ban on badla and offer of introduction of derivatives trading as an alternative. However, ``independent'' members became nominees of brokers. This warranted ``good regulators, dedicated and ready to learn''.

Mr. Ramakrishna said the evil of badla as practised in the BSE lay in that it did not segregate cash trading from quasi-forward trading and put the investors at risk. Rules regarding issue of contract notes along with details had not been enforced by the stock exchange authorities, while many investors too were indifferent to its importance, and this was exploited by brokers.

While speculation was a legitimate activity on the stock market, the badla system helped the speculator at the cost of the genuine investor. The derivatives system provided for the counter-party risk being borne by the stock exchange but this was absent in badla. Futures trading was based on fixed financial terms, unlike badla.

Denying that badla was crucial for sustaining volumes, Mr. Ramakrishna said that after badla was banned, volumes in specified scrips had increased. Systems introduced later like ALBM and BLESS were making speculation easy by automatic lending of shares and funds. Margins were often not collected at all.

Detailing how the present scam in the market involving the Madhavpura Mercantile Cooperative Bank was similar to the Harshad Mehta scam, Mr. Ramakrishna said SEBI should act firmly against wrong-doers and consult on a weekly basis with the Reserve Bank of India to monitor the flow of funds. It should collect market intelligence on a continuing basis as done by regulators in the U.S. and elsewhere, he added.

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