The authors test the existence of speculative activity in the Indian stock market during badla and post-badla period. They further investigate whether speculative activity migrated to single stocks futures market after banning of badla system. In both the tests it is found that there is no evidence of strong speculative activity in the Indian market. The research raises some questions on the regulators decision of banning badla system and sheds some light on the future decisions with respect to single stock futures market.

Banning of badla system in India has taken out age old tradition of deferring settlement obligations. Badla allows deferment of settlement obligations into the next settlement period. With badla, the market was like a futures market without a stated expiration date. Since settlement could be deferred indefinitely, the counter party risk was commensurately large. Thus, badla had potential to encourage speculation.

In March 1994, Securities Exchange Board of India (SEBI) banned the badla system blaming it for ‘excessive speculation’ and destabilization of the market due to excessive volatility in the Indian stock market. SEBI’s decision to effectively ban the badla (carry forward) practice has been an issue of concern for the Indian capital market. On the one side were the regulators and certain market participants, who blamed the badla system for causing ‘excessive speculation’ in Indian stock markets. On the other side were brokers and stock exchange officials who were unwilling to give up a system which has served them well. They argued that its ban will drive down the liquidity and the trading volume thereby increasing the cost of trading for small investors.

Due to excessive pressure badla was reintroduced in 1996 on Bombay Stock Exchange (BSE). On July 2001 badla was again banned with the same objective—excessive speculation and destabilization effects. Berkman and Eleswarapu (1998) examined the effect of badla trading on stock return volatility by comparing a sample of Group-A and Group-B stocks in BSE. They found no evidence that supports the allegations made by regulators that badla trading destabilizes stock prices and causes excessive volatility.