Banning the badla

By C. R. L. Narasimhan

The Securities and Exchange Board of India's (SEBI) decision to abolish all deferral products - ALBM, BLESS, MCFS - from July 2 was perhaps a foregone conclusion. With the May 5 meeting failing to decide (ostensibly because of the absence of two board members) the expectations from the regulator were raised to a level where any backtracking was not feasible.

Badla (this is what underlines all the `deferral' products) has always been an emotive issue. And carry forward which has become synonymous with badla could not be tolerated because it represented, according to one view, the worst of both the cash (spot) and the futures markets. More important - and what made SEBI to impose the ban - has been the timing. With the Joint Parliamentary Committee (JPC) set up to look into the stock market irregularities having already held its first sitting, the SEBI has to be seen to be decisive.

During any stock market imbroglio in the past the badla has been the whipping boy. One major reason of course is that the 135 year old system (one can call it an institution) has not been easily understood by many outside the charmed circle of brokers and operators. Stock exchange administrators who are supposed to be in control of exchange matters including of course the badla could rarely rein in the excesses. As the recent unsavoury happenings at the BSE show it was the brokers who were calling the shots.

Whatever advantages the badla conferred to other classes than the brokers were lost sight of because of the unfair practices associated with it. Like any other mechanism the badla and its later modified versions have their plus and minus points. But today's official perception is all negative. Hence the impetus to stamp it out altogether, presumably to save the regulator from the JPC's wrath.

The SEBI has also claimed that the carry forward system as it exists in India will have to go so that the stock exchanges follow international practices. The cornerstone of that strategy is to speed up the introduction of derivatives and have a uniform timeframe for settlements. Index derivatives have already come in, albeit in a modest way, but specific stock options are now planned.

By far the most noteworthy of the new measures is to introduce rolling settlement on a T plus 5 basis for 414 stocks from July 2 and extend it to all stocks by the start of the year 2002. That is going to be an ambitious task given that the regulator will be up against some well entrenched opposition. Here perhaps the SEBI has been lucky: the present is ideal to press ahead with tough reforms of this genre.

In the end, the success or failure of this brand of regulatory shock therapy will depend on how the changes are received by the market participants. Derivatives of any variety need to be demystified before they win widespread acceptance. The SEBI's responsibility towards educating investors will also be put to test.

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Section  : Business
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