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Friday, September 18, 2020

Explained: What stock market margin norms mean for investors?

Market regulator Sebi did not have a margin requirement for cash market transactions so far, but now, clients will have to cough up 20 per cent of the cost of the shares and it will be applicable to buying and selling of securities.

Written by George Mathew , Edited by Explained Desk | Mumbai | Updated: September 5, 2020 4:27:20 pm
Stock Market, new stock market, Stock market investors, Sebi, Explained Economics, Express Explained, market regulatorInvestors who trade in shares using the existing shares as pledge in the demat account can relax now.(Bloomberg Photo: Dhiraj Singh)

On September 1, stock markets implemented a transparent and stringent mechanism of collecting 20 per cent upfront margin on cash market transactions and tightened the pledging system to protect the interests of investors. Though the new rules, postponed twice earlier, have created some teething troubles, such as arranging margins and settlement delays, the situation is expected to become normal in a few days.

What’s the 20 per cent margin collection all about?

Market regulator Sebi did not have any margin requirement for cash market transactions so far, but now clients will have to cough up 20 per cent of the cost of the shares and it will be applicable to buying and selling of securities. The margins from clients were required only in the futures & options segment till last year and cash margins were not demanded from clients. It was adjusted by brokers. While Sebi tightened the margins norms due to the misuse of securities by unscrupulous brokers in the industry, the new norms have created new challenges for the brokers. Investors will have to pay 20 per cent on the same day and the balance on the subsequent day.

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How will it impact the pledging system?

Investors had lost crores of rupees in the unauthorized pledging of shares by Karvy. The Karvy issue forced the regulator to tighten the pledging system. The unauthorized pooling system and manipulation by brokers using the power of attorney (PoA) of clients will end now. They used to take out money from clients’ accounts and adjust for other clients’ requirements. Sebi rules say a client can pledge securities with a trading member, who will in turn re-pledge the same with the clearing member. The clearing member will re-pledge the same to Clearing Corporation (CC). At the same time, shares will remain in the demat account of the client and the complete trail of pledging process will be registered in the demat account of the client. Investors who trade in shares using the existing shares as pledge in the demat account can relax now.

However, brokers faced issues while arranging margins for investors who pledged their shares, leading to a delay in settlement in the first three days.

What has been the reaction of brokers?

Brokers obviously wanted the regulator to put both the imposition of 20 per cent margins on cash market transactions and implementation of the new pledging norms on hold. This is because they need to upgrade their systems and also the illegal “adjustment” using the clients money has stopped. Brokers are hopeful of attaining normalcy in the next two weeks.

Will it make markets more transparent and safer?

The 20 per cent upfront margin collection will help in orderly movement of the stock markets which had witnessed excessive speculation in the last couple of months. The tightening of the pledging system will make investors’ money safer and lead to more transparency and less manipulation. “Every significant transition heralds a new beginning and the hope of better outcomes. Let us look forward to a safer and more transparent stock trading ecosystem. Barring initial teething issues in implementation, once the system stabilizes, we expect it to deliver a win-win situation for all stakeholders. In fact, this can be a bedrock for the growth of the capital markets and its efficient functioning,” said Vinay Punjabi, Head of Sales & Marketing, Ventura Securities.

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