Forward Trading in Shares

Summary

Forward Trading in Shares is a technical brief by M. R. Mayya, former Executive Director of the Bombay Stock Exchange, written in April 1996 and published as a Forum of Free Enterprise pamphlet. Mayya traces the century-long history of forward or badla trading on Indian exchanges — its prohibition by Government of India on 27 June 1969 as ‘contracts for the clearing’, its return in 1983 under the new label of ‘specified shares’, and its second prohibition by SEBI on 13 December 1993. He explains in detail the institutional mechanics: hand delivery contracts, settlement cycles, the role of vyaj badlawalas (financiers who lend money via contango / ‘seedha badla’) and teji or mal badlawalas (financiers who lend shares via backwardation / ‘ulta badla’), and the way carry forward charges emerge from market forces during the badla session.

The pamphlet’s argumentative center is a defence of carry forward trading as economically useful and a sharp critique of SEBI’s regulatory posture. Mayya argues that the carry forward facility injects liquidity, moderates extreme price movements by enabling short selling in rising markets and long purchases in falling ones, and acts as an indispensable risk-hedging instrument akin to options and futures. Drawing on the recommendations of the Patel Committee — on which he himself served alongside G. S. Patel and Deepak S. Parekh — he endorses a screen-based, transparent revival of carry forward with built-in safety valves, while objecting to two specific SEBI stipulations: the 25 per cent broker-wise outstanding position cap, which he finds unworkable given the specialisation of broker houses, and the steep 20/30/40/50 per cent margin schedule on successive settlements, which he sees as cumbersome and damaging to market liquidity.

Throughout, Mayya frames speculators as legitimate market participants whose activity is ‘totally an act of volition’ and quotes The Economist of London approvingly to the effect that ‘speculators are public servants’ whose work in a market economy is indispensable. The text reads as an insider’s technocratic brief for liberalising Indian securities regulation along lines consistent with international futures-market practice.

Key points

• Forward / badla trading existed on Indian exchanges for nearly 100 years before being prohibited by Government of India on 27 June 1969 as ‘contracts for the clearing’.

• After a 14-year gap, forward trading returned in 1983 under the label ‘specified shares’ at the Bombay, Calcutta, Delhi and Ahmedabad exchanges, without the 1969 notification being rescinded.

• SEBI banned trading in specified shares on 13 December 1993; at that point 133 specified shares accounted for roughly Rs.21,000 crore in market capitalisation, about 60 per cent of total stock market cap of Rs.350,000 crore.

• Mayya explains the mechanics of vyaj badla (contango / seedha badla — money lending by financiers) and mal badla (backwardation / ulta badla — share lending), and shows that carry forward charges are determined by market forces in the badla session.

• The Patel Committee (appointed by SEBI on 22 February 1995, reporting on 20 March 1995) recommended resumption of carry forward with screen-based trading, transaction IDs, a 90-day cap, and audit certification.

• Mayya defends carry forward as a liquidity-enhancing, price-moderating, risk-hedging facility and cites empirical support from the 1994 BSE Sensex rise to 4643.31 and 1995 fall to 2996.84 as a case where carry over would have moderated volatility.

• He criticises SEBI’s 25 per cent broker-wise outstanding position cap as impractical given the actual specialisation of broker houses across foreign institutional, mutual fund, government securities, jobbing and odd-lot lines.

• He criticises SEBI’s escalating 20/30/40/50 per cent margin schedule on successive carry-forward settlements as cumbersome and damaging to liquidity, arguing margins on Indian markets should track the 7-8 per cent international futures norm, adjusted for the absence of daily mark-to-market.