There are few principles in economics, or commonsensical life, more fundamental than the principle of equality between a buyer and a seller. If the two face a different price, something is wrong, right? Wrong. Welcome to India where the anthropologists are delighted to find primitive behaviour, called badla, in its capital market.

Most newspapers in most countries would not think it interesting to have several articles devoted to voodoo in millennium year 2000. (Sudhir Mulji's gratuitously, and wrongly, titled article, SEBI's irrational folly, appeared in this very same space on May 11, 2000). But then the rest of the world stopped indulging in differentiating between buyers and sellers centuries ago, and we will get there only on June 1st, Insha allah, unless the Bombay Stock Exchange (BSE) decides to appoint ex-Justice Chandrachud, of match- fixing fame, to look into badla-fixing.

Badla is nothing more than a one-week futures contract. Both the buyer and seller borrow money to finance their purchase and sale. Let the price of the share be Rs. 1000, and the interest rate on one-week money be at an annual rate of 8 percent. A one-week forward contract would cost Rs.1001.5 to both parties, the price being Rs. 1000 and the interest cost being Rs. 1.5. The buyer borrows money, the seller borrows shares.

The futures system satisfies the basic golden rule of finance. Both buyer and seller face the same price - Rs. 1000. But as every Indian investor knows, this is not what is practiced by the BSE. In the BSE's back-room, there are two different sellers of one- week forward securities -the genuine sellers i.e. those with securities in possession, and the naked short-sellers i.e. those without any securities to sell. The genuine seller has securities to offer and so receives the badla due to his forgoing of an asset. The naked short-seller is, well, naked. He has no securities, but he is the kingpin of the racket and therefore jumps ahead of the genuine short-seller to receive the financing fee of Rs. 1.5!

Is the naked short-seller allowed to exist anywhere in the world, let alone receive a healthy premium? No. The naked short-seller is forced to put his clothes on; he is made to borrow the shares from somebody who owns them, and pay that person the financing fee. In a non-feudal world, the market works; regardless of the security in question (e.g. Microsoft or AOL), the forward buyer and the forward seller both purchase/sell at Rs. 1000, and both pay financing charges of Rs. 1.5.

However, in BSE's Mumbai, the badla is transacted in a most non-transparent manner every Saturday. It is non-transparency which makes the BSE rich. Crude barriers to entry mean that not all badla financiers are allowed to enter the rarefied financier space and bring down monopoly rates of interest on lending to market rates of interest (till April, 2000, badla financing rates averaged close to 28 percent or 250 percent more than the call money rate). Nor does every security attract the same feudal rate. (Badla on Infosys is at a different rate than badla on Satyam). What is transparent is that the naked short- seller is far ahead in the queue in terms of financing because his sale gets squared of first against that of the long buyer.

What is the price of the security on Monday morning ? Why, it is the same as on Saturday evening i.e. Rs. 1000. So if the position is squared of on Monday at Rs. 1000, the naked short-seller pockets goes home richer by Rs. 1.5; the Saturday buyer has a profit of zero (minus financing costs).

Note that the financing charge is not connected to the Saturday or Monday price, an error famously made by my good friend, Mr. Mulji. He contends that the price of a good is the price inclusive of financing costs and he adds a mis-read of Nobel economists Arrow and Debreu to buttress his claims. If that were the case, then the Sensex today would be at 16000 compared to its level of 4285 eight long years ago, end March 1992. The price today: 10 percent below the 1992 price. The 16,000 level is obtained by using Mulji's formula of equating forward price with the actual buying price plus financing charges of 18 percent annually for eight years.

Finance charges cannot affect the price of a good. Exclusive of brokerage (transaction) charges, the buyers and sellers of all property - be it asses, or goats, or houses, or shares - transact business at the same price. There is symmetry, logic, inevitability, and certainly no mystery, in the equivalence between the buyer and the seller. However, mystery is the hallmark of the primitive, nee native, voodoo that is practiced by men in dark suits along the subterranean shores of Mumbai.

Because of concerted lobbying by the BSE, the feudal badla system has persisted into 2000. The reason for the intense lobbying is not hard to find - a quick glance at the table shows that the average BSE broker, in the first four months of 2000, has already made about Rs. 10 crores in excess thanks-to-badla profits. Even in a bad year like 1998, excess per broker profits were about Rs. 8 crores. In 1999, each of the top 50 BSE brokers made about Rs. 1.1 crores in badla cmmissions alone, and more than Rs. 100 crore each in excess badla profits.

Rational SEBI has finally thought it fit to ban naked short-sales from June 1st. Since this announcement, badla financing rates have collapsed towards equality with call money rates. However, BSE's major public-sector Babu competitor, the National Stock Exchange (NSE), has thought it fit to start its own non-transparent badla system, called the Automated Lending and Borrowing Mechanism (ALBM). What is really good news is that the Babu's are becoming eager to exploit their duopoly status, especially since the egregious practices of BSE are finally being tamed. But, unfortunately for the investor, it is more a case of George Orwell's 1984: "you looked from the pigs to the cows, and you couldn't see the difference". The only thing automated on ALBM is the ring of excess profits, this time for NSE and its brokers. On its carry-forward transactions, the NSE is charging a royal 18 to 20 percent, considerably above the no naked short-seller badla rate of 7-8 percent. Why is the NSE now getting away with financial highway robbery?

Something for SEBI to consider if it wants to continue on its desire, and recent trend, towards market friendly regulation. Otherwise, exchanges will continue to find ALBM type of ways to extract obscene profits from hapless investors. The torch of badla is being passed from the pigs to the cows. What is tragic is that it is not clear what the revenge is for.