Carry Forward & Badla Transaction
Carry Forward & Badla Transaction
Carry Forward & Badla Transaction
Carry forward transaction was practiced earlier in the stock market. In the
specified group, share settlement can be done in three ways;
(a) Delivery against payment
(b) Squaring up of the transaction (i.e. a purchase is offset by sales and vice-
versa)
(c) Carrying over the settlement to the next settlement period.
The first two types are simple but the third one is complex.
It can be explained by an example.
An investor Mr. A buys 1000 shares on Monday at the price of Rs.50 but on the
settlement day the settlement price became Rs. 60, Now Mr. A has three
options;
(d) Paying Rs. 50,000 and taking delivery of the Shares
(e) Selling and booking a profit (Rs. 60- Rs.50) X 1000 = Rs. 10,000
(f) Carrying the transaction forward if he believes that the price may go up
further.
Carry Forward & Badla Financers:
In the third situation Mr. A postponing the payment as well as taking
delivery of the shares.
Either he can enter into a contract with the carry forward broker or with
the badla financer. It depends upon the condition whether he has bought the
shares straight from the carry forward broker or not.
He has to get the difference between the consideration for which he has
bought and the mark-up price on the settlement day.
The mark-up price is determined by the stock exchanges i.e. the rate at
which the settlement has to be carried over.
The mark-up price resembles the closing market price of the previous day.
Forward seller or the Badla financer executes a resale contract with Mr. A
for a subsequent settlement at the new rate i.e. Rs. 60 plus the badla charges
( the interest factor) for the remaining amount to be settled (Rs.50,000).
Now, on the next settlement date if there is a further rise in the price of
the scrip, Mr. A again has the option either to chose the transaction or carry
forward the settlement to the next cycle.
Carry Forward & Badla Financers:
RISK CONTAINMENT:
1. Position Limits :
There will be a position limit per broker of Rs.40 crores in the aggregate
and Rs 5 crores per scrip. These limits will be determined on the basis of
gross position for the broker. These limits would apply only to trade
positions that are netted against ALBM positions, and would not apply to
stand-alone ALBM positions. However, the positions of pure securities
borrowers, who would be withdrawing the shares would be included in
the above mentioned overall position limit of Rs.40 crores in aggregate
and Rs.5 crores per scrip.
AUTOMATED LENDING AND BORROWING MECHANISM (ALBM):