1.6 Query: Accounting For Badla Transactions.
- A company is involved in ‘badla’ transaction. In badla transaction, the investor having surplus money finance 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 ‘badal’.
- 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.
- The querist has referred the following issues for the opinion of the Expert Advisory Committee:
- Whether these ‘badla’ transaction should be shown as investment or as loans and advances
- Whether in profit and loss account, the same would be shown as purchase and sale or, only differential income should be accounted for.
- Whether provisions of section 370 or section 372 of the Companies Act, 1956, will apply to these transactions.
Opinion April 11, 1991
- 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 taken place simultaneouslyand in the view of the committee, it is purely 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.
- The Committee is of the following opinion in respect of the issues raised in para 3 of the query:
- The badla’ transaction should be shown as ‘loans and advance’.
- In profit and loss account, the additional margin, i.e., ‘badla’ should be accounted for as income.
- 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.