The suspension of forward trading created a real vacuum in the stock market. The stock brokers devised the extra-legal badla system to fill up this vacuum. Under this badla system, securities contract was turned into a carry-forward instrument merely by closing the contract on the 14th day and replacing it by a new hand-delivery contract between the same buyer and seller in respect of the same securities.
(SEBI bans the Badla system)
Thus, only the difference between the ‘contract price’ and the ‘market price’ would change hands between the buyer and the seller. Badla transactions became the predominant form of Stock Exchange transactions. Since real transactions involving the transfer of securities became a microscopic minority, serious problem of excessive speculation developed in the stock market. In short, the badla system led to excessive speculation and short-selling often amounting to gambling. The Securities and Exchange Board of India (SEBI) banned the badla system in December 1993.
There was an increasing demand for the legitimate forward trading to give boost to the stock market. Since stock market quotations are often considered as the barometers of a country’s economy, the SEBI and the Government should stimulate stock market. The SEBI, therefore, reintroduced badla (forward trading) on July 27, 1995. Now, with the introduction of derivatives in stock market the same purpose is served by the derivatives called futures as the old badla system.
The Bombay Stock Exchange is one of the recognized Stock Exchanges in India. This Stock Exchange is popularly known as Dalal Street Stock Market. It handles around three-fourth of the total trading in securities in India.
The number of companies listed on the Bombay Stock Exchange at the December-end 1993 was 3,585.
The BSE is the world’s 11th largest stock exchange with an overall market capitalization of more than $ 2 Trillion as of July, 2017.
More than 5500 companies are publicly listed on the BSE (2017)
BSE is listed on NSE.
(We shall read more about Stock exchanges and its functioning in the later chapters)