SEBI plans new margin system

According to the study paper, the regulator needs to be more practical on margin systems. It says the margin system that NSE has put in place in consultation with SEBI is grossly impractical. The quantum of margin is so high that the activities in the capital market have been paralysed and on certain occasions they even exceed the total outstanding exposure of the stock exchange members put together.

The association calls for a thorough review of the system. It suggests that the deposits to the tune of Rs 75 lakh collected from each NSE member should be given full weightage,while determining gross exposure limits. Limits recommended in the case of gross and net exposures should be increased.

Besides, the SEBI is charging heavy registration fee from market intermediaries. Stock brokers are required to pay 0.01 per cent of their turnover to the market regulator as registration charges. In 1992, when the SEBI had prescribed the fee, the basis had been that it is effectively 0.5 per cent of the brokerage earned by the broker as at the time the normal brokerage rate used to be one to two per cent.

However, the situation has changed substantially since 1992. In particular after the start of screen-based trading and stock broker8217;s availability in every part of the country through NSE, the competitiveness has brought down the rates of brokerage tremendously.

Further, the brokerage varies significantly between delivery-based and squared up transactions. In general, delivery based transaction attracts a normal brokerage of 0.5 per cent to one per cent, while squared up transactiongoes as low as from 0.05 per cent to 0.1 per cent. In fact, 90 per cent of turnover is squared up turnover. As such, the average brokerage earned by a broker on his turnover is only around 0.2 per cent to 0.3 per cent.

In this environment, if 0.01 per cent of the turnover becomes the fee payable to the SEBI, 20 per cent of the brokerage earned will go to the regulator. If such a substantial portion goes to SEBI, about 80 per cent of the brokers, will have to close their offices. Accordingly, various associations of stock brokers had to approach the judiciary against the levy of SEBI fee.

The paper suggests an out of court settlement whereby SEBI should levy its annual fee on the basis of brokerage earned by a member. A fee of 0.5 per cent of the brokerage earned with a cap of Rs one lakh per annum appears appropriate, it says.

The study paper criticises the regulator for insisting on uniform settlement cycle for major stock exchanges in the country, stating that theoretically the proposed system mayappear to be sound, but practically this will result into a further downfall of the market.

The uniform system, the association alleges, will result into substantial reduction in overall turnover and liquidity on the stock exchange. Besides, trading rules, interest free deposit requirements, net worth margin, circuit breakers and other similar settlement systems are to be synchronised before uniform settlement can be implemented.

The association also criticises the regulator for imposing 8220;impractical8221; requirements like making deliveries within 48 hours of pay-out irrespective of necessary funds by the clients, issuing contract notes within 24 hours, disabling the member brokers to trade without giving them an opportunity of being heard and initiating inquiry on investors8217; clients even without verifying the contents of the complaint.