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Badla financiers lost Rs 5 billion in market crisis

Ashwin Punnen & Sangita Shah

Badla financiers, mostly corporates and individuals with a high networth, are understood to have lost over Rs 5 billion in the recent market crisis on account of misuse of their funds by brokers.

The brokers, it now turns out, used the funds, which were meant to be invested in the badla segment, for meeting their pay-in requirements and for speculative trading through proprietary accounts.

Several big brokers of the Bombay Stock Exchange and National Stock Exchange are understood to be involved, according to market sources.

These brokers apparently invested the money in stocks assuming that the returns would be higher than the badla charges they would have to pay their clients. But they incurred huge losses following the meltdown in tech stocks and, to avoid defaults, used the funds to meet their pay-in obligations.

Sources said a financial arm of a Delhi-based pharmaceutical company alone had lost about Rs 1.6 billion, which it had given to a big time broking firm. The amount involved with most brokers who allegedly misused their clients' badla finance ranges from Rs 10 million to Rs 400 million. A large Bombay brokerage house has reportedly denied clients repayment of such funds to the tune of Rs 2 billion.

These brokers are understood to have told their clients that it was not possible for them to return the money at this juncture and that they were willing to pay interest on the money. Some of these brokers were pressurising their clients to accept just a part of the capital invested as a one-time settlement, sources said.

However, some brokers are of the view that certain clients, who had lent money on fixed interest to brokers on loan accounts, are now clamouring to withdraw the money.

In the badla financing system, a broker has to deposit the client's money with the clearing bank. Brokers are supposed to keep their clients' money for badla financing in the latter's pool accounts with the clearing bank. However, the clearing bank does not give a client code for such deposited amounts.

Since the clearing bank is not equipped to allot a code number to each financier, and does not issue any certificate on the holding of the financiers, brokers are free to divert the money.

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