Everyone’s worst fears came true in Kolkata on March 8, as brokers close to Ketan Parekh defaulted on payments worth Rs 96 crore. And next settlement day, March 16, the defaults could go up to Rs 600 crore or more, which would be a catastrophe for the Calcutta Stock Exchange (cse), which has trade guarantee funds of only about Rs 200 crore.
How has the cse, where volumes are minuscule compared to the nse and bse, become the focal point in the current meltdown? Big deals in the Indian stockmarkets are made mainly on borrowed funds. These are done through official screen-based Automatic Lending and Borrowing Mechanism on the nse and through badla financing, where the investor borrows cash, which he pays back out of the profits he makes when he sells his shares. Badla financiers run practically no risk because the stock exchanges impose a margin on all purchases and carry-forwards. Every exchange also has a Trade Guarantee Fund (tgf) contributed by brokers. The money lying in margins and in the tgf is in normal circumstances more than enough to tide over a default. But there is also an unofficial badla ring which advances funds with no margins imposed and with both risks and rewards much bigger than the official lending system. Kolkata is the largest centre for this unofficial funding and as Parekh and his associates saw official borrowing channels dry up for them, they relied increasingly on the Kolkata ring.