ISLAMABAD, Nov 15: A US team of forensic investigators who arrived here in July to probe the March 2005 market crash were baffled by badla system and took more than two months to understand it.

Badla also known as Carry-over Transaction (COT) is a unique system of local stock markets which is not in place anywhere else in the world. It had been playing role in market turmoil since 2001 and was one of the major causes of the last year’s market crash that inflicted over $13 billion losses on small investors.

Sources in the Finance Ministry said the SECP had to waste considerable time to make the forensic officers of the US firm —Diligence — understand the difference between the Continuous Funding System (CFS) and badla.

CFS has replaced badla.

“They were taken by surprise when they were briefed about COT. It took a long time to make them understand how badla caused the fall of market from time to time,” an SECP official told Dawn requesting anonymity.

He said the investigators also faced numerous problems when they started linking badla to the last year’s market crash as they were helpless to distinguish the practical difference between badla and the CFS.

This has delayed the completion of forensic investigation within three months i.e. by first week of October 2006.

Sources said that the investigators were of the view that the CFS was almost the same thing as badla. They also informed the SECP that in fact CFS was even more dangerous to the market than badla because the cap of badla was just Rs25bn, when it caused the market crash, while the CFS cap had now been increased up to Rs55bn.

Official sources said that the SECP had never tried to learn from the experiences of the Indian stock market where there was also the badla system in place sometimes back but is no more there now.

In 1993, badla was banned in India. It was re-introduced in 1996 with a few amendments including “rolling settlement”. But the Indian corporate sector regulator banned it again in 2001 and introduced T+5 and rolling settlement in specified securities that provided a number of safeguards to small investors.

In Pakistan, CFS was introduced after the last year’s market crash as an interim measure to replace badla financing in order to enhance the level of liquidity in the market while alternate modes of leverage financing were being developed.

The former chairman of SECP, Dr Tariq Hassan, wanted to replace the badla with Margin Financing – a system which is operating in almost all stock exchanges of the world. But, the ex-chairman caved in to immense pressure from brokers and had to announce replacement of badla with CFS.

But, now SECP has reviewed the current CFS system and identified several risks and inequalities in it. To ensure transparency, the commission has now proposed CFS MK II – a revised version of CFS. The commission claims that the revised version of CFS would adequately cover market risks associated with the current CFS.

However, experts were of the opinion that there was little difference between the existing and revised version of the CFS and that both had their orientation from the infamous badla system.