SEBI had introduced a new set of rules on margin trading came with effect from Sept. 1, with the objective of bringing in stricter regulations to minimise risk of fraud. It basically aims at bringing transparency and preventing misuse of clients’ shares by brokers. Earlier this year, SEBI had banned the transfer of clients’ securities to demat accounts of trading and clearing members in majorly because of the Karvy Stock Broking Ltd. crisis.
Till the date, an upfront cash margin or pledging of shares to cover the margin was mandatory whenever a client wanted to buy a share. Subsequently, the majority of clients would give their power of attorney to a broker who would then use their existing shareholdings to access margins for derivative trades. This led to some brokers pooling securities across clients, using one client’s assets as margin collateral for another client who was likely short of funds which continued till the Karvy Stock Broking Ltd. Incident. In this, the investments of 95,000 clients were illegally transferred by the broker to its own account and pledged without any authorization. Following this, SEBI banned the pooling of securities and directed compulsory maintenance of separate accounts. The new rules have been viewed as an extension of these.
Under this, when a person wishes to buy shares, he can do so only against pledged cash or shares which necessarily need to be present with him and not the broker. One time passwords will be sent to them for the authorization of individual pledge requests. The transaction will get settled in (T+2 days) as against the old provision where notional proceeds could be used as margin for a new trade instantly. Further, the intraday profits can also not be used to enter new trades. Also, sale proceeds from holdings can be used to take new positions only after early pay-in. In fact, even option sell credit can be used only to buy options on the same trading day i.e you can exit a buy option and enter into fresh buy option the same day but cannot sell an option till T+1. Only 60% of the value of BTST trades sold will be available to take new positions in F&O.
Also under the new margin rules, all buy and sell transactions require payment of margin, except in the case of transactions via early pay-in. This implies that the clients will have to ensure adequate liquidity to back any transactions.
The estimated duration for the process of pledging of shares ranges between 3 hours to a full working day. So brokers advise that those trading frequently should pledge all their shares so as to enable future trades easily. In case of pledging of partial shares, a client will only get the benefit of it in a day or so. This could lead to missed opportunities. With it’s meager 0.1% chance of happening, there is however, a danger to this; i.e. if a client exceeds leverage, the broker will have the right to sell the pledged shares to recover the lost money. However, the probability of this happening is very less as there are a number of other rules and checks by the regulator to prevent any such occurrence.