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BUSINESS: STOCK MARKETS
Revenge Of Badla
People who lent money to stockbrokers for financing speculators
find themselves at the receiving end of yet another scam
By Sheela Raval
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BOUNCERS:
Paleja is left with post-dated cheques that keep getting dishonoured |
Paresh Paleja, 40, is a desperate man. For over
two months, the Mumbai trader has knocked on every possible door for help.
But it seems there just isn't a way out of the financial mess he is in
today. No, Paleja hasn't lost money in the Ketan Parekh scam or the US-64
crash. Instead, he has been fleeced by the vyaj badla system which was
used to fund the now-banned badla in Indian stock markets.
Badla was a widely used system of financing
stock market operations before it was banned by SEBI. Prior to July 2,
the market comprised two kinds of buyers-those who purchased shares and
took them into possession and those who did not take delivery of the shares
but carried forward the transaction to the next settlement by paying badla,
or interest, on the outstanding amount. So popular was badla that after
it was banned, brokers across the country went on strike to protest against
the decision.
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FIGHTING A LOST CAUSE: BSE brokers protesting
against the ban on badla
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Where did Paleja fit in? Unlike in developed
markets, there is limited funding from banks in India for stock market
operations. In the NSE, brokers could fund operations by the Automated
Lending & Borrowing Mechanism (ALBM). In the BSE there was the Borrowing
& Lending of Securities Scheme. But not every broker or transaction
met the prudential norms required for such funding. Besides, the demand
outstripped the supply.
So brokers borrowed money from individuals like
Paleja to bridge the gap between margin and cost of the shares and paid
them good returns of 16-18 per cent annually. Lured by the high returns
of an ostensibly safe investment system-the vyaj badla-he collected funds
from his family and relatives and put Rs 14 lakh in Century Consultants,
a stock-broking firm, in December 2000.
That was in the good times. When stock prices
were reaching stratospheric levels. When Ketan Parekh was like King Midas,
turning to gold every scrip he touched. After the stock markets crashed,
investors, punters and even brokers found the value of their investments
eroded beyond recognition.
Like Paleja, hundreds of others have been sucked
into the badla scam. As the post-dated cheques from Century Consultants
turned into rubber balls, Paleja and 156 other depositors with the firm
complained to the Economic Offences Wing (EOW) of the Mumbai Police. They
claimed the company had cheated them of more than Rs 100 crore.
And it's not just Century Consultants. In the
past three months, the city police have registered cases of cheating and
fraud against at least six individuals or companies dealing in badla.
The total amount involved: over Rs 500 crore. Among them were two brokers
Ajay Thakkar and Bimal Gandhi, both of whom allegedly committed suicide
after the stocks crash, and Arvind Johri, owner of the Mumbai-based Infosys
& Century Finance, which has allegedly cheated 1,500 depositors of
Rs 100 crore. "Stock market-related crimes are rising rapidly,"
admits Manoj Lohia, DCP, EOW, Mumbai, "but we do not have enough
skilled staff to tackle them."
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