1.6. Query:          

  Accounting for badla transactions.

1. A company is involved in ‘badla’ transactions. In ‘badla’ transactions, the investor having surplus money finances the outstanding purchase of another investor and takes the delivery with a simultaneous transaction in which the script is resold with some additional margin known as ‘badla’.

2. The querist has also invited the attention of the Committee to its earlier opinion reported in Compendium of Opinions, Volume I, at Pages I-189 and I-190.

3.The querist has referred the following issues for the opinion of the Expert Advisory Committee:

a) Whether these ‘badla’ transactions should be shown as investments or as loans and advances.

b) Whether in profit and loss account, the same should be shown as purchase and sale or, only differential income should be accounted for.

c) Whether provisions of section 370 or section 372 of the Companies Act, 1956, will apply to these transactions.

                                                                           Opinion                                      April 11, 1991

1.The Committee is of the view that a transaction by way of ‘badla’ is in the nature of lending operation, under which one party lends money to another on the security of shares. In a ‘badla’ transaction, sale and purchase takes place simultaneously and in the view of the Committee, it is purely a lending operation. This view is also supported by the fact that the person who finances the ‘badla’ transactions, does not gain or lose if the market price of the security, in respect of which ‘badla’ transaction is entered, fluctuates. He only gets a margin called ‘badla’ and in substance, it is a lending operation.

2. The Committee is of the following opinion in respect of the issues raised in para 3 of the query:

                        a) The ‘badla’ transaction should be shown as ‘loans and advances’.

b) In profit and loss account, the additional margin, i.e., ‘badla’ should be accounted for as income.

c) The provisions of section 370 of the Companies Act, 1956 are applicable to the badla transactions. The provisions

of section 372 of the Companies Act, 1956, however, are not applicable to these transactions. But in case the shares get

transferred in the name of the company involved in ‘badla’ transaction on account of any reason such as book

closing, etc., the provisions of section 372 shall be applicable.

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