Everybody in the market was incensed but scared, yet the government was adamant. A traditional system of trading, seen as hugely exploitative and prone to corruption, in which the middleman doubled up as a financier/warehouser/consultant, was being banned. It was to be replaced by new-fangled, technology-driven structures.
The government claimed this would clean up the Augean stables and create new opportunities. But the market players feared they would become fodder for big capital, robbed of savings and inheritance. Cornered, they were being mobilised to hit back against the new policies. A big part of India’s economy could be held to ransom.
Time for a short quiz:
Raghav Bahl: What is the market I am referring to?
Your answer (a): India’s agriculture mandis, or regional commodity exchanges.
Raghav Bahl: Who are the principal players who were feeling threatened?
Your answer (b): Farmers and arthiyas, their traditional middlemen-cum-financiers.
Raghav Bahl: Which year is this turmoil from?
Your answer (c): Circa 2020, after the government had rammed through three infamous farm bills.
Afsos, galat jawab! (Sorry, wrong answers.) The correct ones are:
- (a) India’s stock markets
- (b) Share traders, brokers and badla financiers, the traditional intermediaries who enabled cash-cum-forward stock trading
- (c) Circa 2001, when the government banned badla from 2 July that year
Change Creates New Champions, Smashes Old Protectorates
The point is simple.
As an economy grows and modernises, there is a clash between traditional market structures familiar to entrenched beneficiaries whose interests are being served efficiently, versus new instruments which are likely to smash old protectorates and create fresh champions.
So, if you think this dynamic is playing out uniquely against Punjab/Haryana farmers now, rewind to 2001.
What Led To ‘Badla’ Ban?
A cabal of 10 rogue brokers at the Calcutta Stock Exchange had abused badla limits, getting trapped in a payments’ crisis. Badla was the homegrown Indian system in which cash, futures, derivatives, and options markets got intertwined in a complex bundle. Worse, the broker not only traded on your behalf, he even financed this ‘mixed up’ transaction, using the five-day settlement window to create leverage upon leverage, using stock he did not own, trying to maximise arbitrage profits.
Predictably, operators would often lose control of their risk exposures, leading to frequent defaults. The government had dared to prohibit badla once, in 1993. But a gang of brokers had rebelled, forcing the State to rescind the ban.
The 1993 ban was a reaction to the 1992 ‘Harshad Mehta scandal’. Mehta was an Indian stockbroker who made headlines for masterminding one of the biggest scams of the Bombay Stock Exchange.
However, by 2001, the National Stock Exchange had overtaken older exchanges, so the stranglehold of traditional brokers had loosened.
The markets had become digital, and derivates were taking off. This gave the government enough gumption to reimpose the ban.
To use a cliché, all hell broke loose (I shudder to think what would have happened if there was Twitter in those days – hashtags like #BadlaBanKillsIndianStocks and #Government’sBadlaOnIndianStocks would have trended ferociously).
Just read some of these authentic comments from marquee financial experts:
- “Overnight suspension will have an adverse impact on trading and liquidity. This in turn will further hammer down the prices when sentiment is already weak” – FICCI
- “Only a few brokers will survive in the emerging scenario” – voices from the Calcutta Stock Exchange
- “It will be a long time before markets attain the present volumes” – Fund Manager at Zurich Asset Management
- “The baby has been thrown out with the bathwater… because they have a broker as a scapegoat, badla ban it is” – BSE Broker
Eerily Similar Prophecies of Doom
Doesn’t the cacophony sound eerily like the prophecies of doom bouncing off the blighted farm bills today? In fact, here are the tangents between the two protests.
- What Arthiyas do for Farmers, Badla Brokers Used to for Stock Traders: Often the ties are or were generational, with families of farmers/arthiyas and traders/brokers dealing with each other from granddad downwards. It also went beyond cut-and-dried transaction commissions, with arthiyas/brokers providing emergency loans during family celebrations or tragedies. More often than not it was a relationship of mutual need and trust. Of course, the interest rate may have been usuriously high in the late teens or early twenties, but since the concept of IRR (internal rate of return) was alien to both the lender and indebted, the villainy was invisible. In a few ‘bad egg situations’, the exploitation grabbed headlines.
- Mandis and Badla Trades Suffer(ed) From Similar Concentration Risks: Both systems are or were lopsided. Almost the entire purchase of wheat and rice at MSP (minimum support prices) is done from the farmers of Punjab, Haryana and West UP. Hardly any other agricultural commodity is purchased from elsewhere, even though MSP is declared for several other crops. Similarly, 95 percent of the badla trades were concentrated in the top 10 stocks. So, the protests, then and now, while vociferous and seemingly pervasive, had a narrow base.
- Dominant Players Threatened by Powerful New Entrants: Today, farmers are petrified that without a statutory security net, they will be hopelessly outmanoeuvred in price/rental negotiations. They fear the big guys could buy their crops or usurp their lands under contract farming rules, or do both, for a song. Earlier, retail brokers were scared that once institutions and foreigners, who were outside the ambit of badla trades, began to invest in the new futures, options, and derivates markets, the smaller guys would simply die.
- Heated, Polarised, Split-Down-The-Middle Debate Between Pro-Changers and Naysayers: Then, as now, there were equally vocal protagonists on either side. The doomsayers felt India’s equity markets would shrivel up in badla’s absence; the optimists were sure a thriving futures and options segment would emerge. Now, wheat/rice growers believe the farm bills are the death knell; others are excited about the prospect of massive investments in rural infrastructure and supply linkages with agriculture industries.
The Future Beckons, Provided...
So, what eventually happened to our stock markets after badla was banned in 2001? The ‘crisis’ was extremely short-lived, with modern futures/options markets simply skyrocketing. Today, nobody even remembers badla trading.
It is my wager that something similar will happen once the government irons out a few wrinkles in the three farm bills, and provided – provided – there is conscious action to ensure that:
- wheat/rice farmers are incentivised to switch to more lucrative cash crops (especially in Punjab and Haryana)
- the current regime of subsidies is replaced by a robust income support program,
- strong farmers’ collectives are encouraged
- safety nets like crop insurance, a trusted/fair contract farming dispute resolution mechanism, and other such measures, are firmly installed
Only then shall we ensure a huge win for our farmers.