What is Badla financing?

As the term itself signifies, 'Badla' means 'something in return'. Badla is the charge, which the investor pays for carrying forward his position. This hedge tool lets the investor take a position in scrip without actually taking delivery of the stock, thus carrying forward his position on the payment of small margin. The Badla system of transactions has been in practice for several decades in the Stock Exchange, Mumbai and serves 3 needs of any stock exchange:

A) Quasi-hedging:
If an investor feels that the price of a particular share is expected to go up or down, without giving or taking the delivery he can participate in the possible volatility of the share.

B) Stock lending:
If a stock lender wishes to short sell without owning the underlying security, he employs the Badla system and lends his stock for a charge.

C) Financing mechanism:
If he wishes to buy the share without paying the full consideration, the financier steps into the CF system and provides the finance to fund the purchase The scheme is known as "Vyaj Badla" or "Badla" financing.

For example, X has bought a stock and does not have the funds to take delivery he can arrange a financier through this carrying-forward mechanism. The financier would make the payment at the prevailing market rate and would take delivery of the shares on X's behalf. X will only have to pay interest on the funds he has borrowed. Vis-à-vis, if you have a sale position and do not have the shares to deliver, you can still arrange through the stock exchange for a lender of securities. An investor can either take the services of a Badla financier or can assume the role of a Badla financier and lend either his money or securities.