| Exit Badla, enter BLESS |
Suppose your intuition tells that there is an upside potential in
Satyam in the coming days and you wish to capitalise on it by taking a position. But you
run short of funds. On a different occasion you wish to sell some securities but you donot
own the underlying security. Quite interesting? Is there something like a banking system
which can take care of your needs? A system which allows, you to buy Satyam without
needing to pay for it and sell some shares without needing to possess one? Yes! we do
have. A system called Badla offered by our stock exchanges gives investors an opportunity
to either go long (purchase) or go short (sell) in a stock over a period that goes beyond
just one settlement.
A long purchase implies having bought a stock, which has a positive outlook, without
having paid for it, with the intention of squaring off the deal at a profit in the future.
A short sell on the other hand is aimed at capitalising on the pessimism prevailing in the
market (or the stock in particular) by selling shares, without actually possessing them.
All this for free? Hold on.
Similar to interest payment in a banking system here the outstanding position will be
carried forward to the next settlement at a 'badla rate' (financing cost), mutually
determined by the borrower and financier. The badla rate will be payable on the making up
price (or Hawala rate, nearly equal to the closing price of the stock at the end of the
settlement). You as an investor do the payment at a special badla session held after the
close of settlement. The deal then gets carried forward to the next settlement. By the
next settlement if your intutions hold right, you make a profit, otherwise...not to
mention.
There is a word of caution. Sometimes, it may so happen that a large number of short
sellers end up in the market and the person who has gone long actually demands delivery.
This means that the investor holding the long position decides to take delivery and pay up
for the same. If the short sellers are unable to find a person to lend stock, then they
will be faced with a possibility of default and end up losing their hard earned bugs. Many
a time this happens in the stock market on account of few operators manipulating the
system, pulling a particular share to a new height and pushing the same pivotal to depths.
This is where the system lacks transparency and where the new BLESS on the lines of NSE's
ALBM assumes importance as an exchange sponsored borrowing and lending mechanism.
Good or bad, today these systems play an important role in our stock markets arena.
Karthik Raj
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