Indo-Pakistan business engagement is not all about gas and pipelines. Pakistan’s stock market—in turmoil over the phasing out of the badla system (carry-over trade)—recently sought advice from India’s market regulator Securities and Exchange Board of India (Sebi).The Securities and Exchange Commission of Pakistan (SECP)—its market regulator—sought guidance from Sebi on ways and means to tackle the phase-out process and the introduction of margin financing through bank funds.‘‘Some of the Karachi market officials contacted Sebi officials unofficially. It’s not about giving guidance. They wanted to know our experience,’’ confirmed a senior government official.Considering India’s own experience in badla and its withdrawal—the old form of badla was scrapped in 1992-93, as was the modified carry-forward system in 2001—this is the least India can do.Badla trading is a decades-old forward trading system where share positions are carried forward after the buyer pays badla—a type of interest—to the seller. ‘‘But this hedging system can be easily manipulated,’’ says a top Indian broker.Karachi Stock Exchange’s KSE-100 index which hit the 10,000-level in March this year has been falling ever since the SECP announced the badla phase-out several weeks ago. The index has fallen by a whopping 33.6 per cent from that magical level to 7481.34 on Wednesday.The main worry of Pakistan investors is that they would have to take deliveries of the stock so far held on badla financing when the ongoing phasing out process is completed.With the traders up in arms against the badla scrapping and the index falling, the regulator has now relaxed the phase-out process and extended the deadline once again. ‘‘We’ve given investors time till November,’’ a senior KSE official told The Indian Express.‘‘The old badla system was used for several years. Margin trading system is a good system. Investors need time to switch over to the new system. The fall in market has nothing to do with economic performance,” said Chaudhry Muhammad Saeed, the Karachi-based President of Federation of Pakistan Chambers of Commerce & Industry.The Karachi Stock Exhange has been among the highest performing bourses in world in the last two years. From the 3,550-level two years ago, the KSE-100 index hit the 10,000-level on March 15, 2005.While badla was considered as a good hedging mechanism, the system was manipulated by unscrupulous operators who used it to rig prices. Sebi—which was then headed by GV Ramakrishna—was forced to ban badla after the 1991-92 securities scam surfaced.Later, the regulator allowed a modified carry-forward system—known as Automated Lending and Borrowing Nechanism (ALBM) on the NSE and Borrowing and Lending of Securities Scheme (BLESS) of the Bombay Stock Exchange. These systems were also banned in 2001 after the Ketan Parekh-led scam came to light in 2000-01. India then kicked off derivatives trading, which is now running smoothly.
