New margin rules kicked in from September 1st after the Securities and Exchange Board of India (SEBI) chose to not extend the deadline in order to implement the new rules on the margin pledge. Sebi’s new margin rules are going to increase transparency and stop brokerage firms and individuals from using the securities held by clients. These norms were initially released in February and were expected to come into effect from June 1st. However, that date was initially extended to August 1st and eventually to September 1st. Even though brokers and other participants were asking for some more time to get their systems up and running as per the new rules, SEBI decided that enough time had been given to make changes and refused any further extension.
Here are the new margin rules implemented by SEBI:
- The stock will stay in the investor’s demat account and will be able to get directly pledged to the corporation that does the clearing. Since the securities will continue to stay in the investors’ demat account, they can continue to enjoy all of their shares’ benefits.
- As per the old system, the brokers handled the stock margins. Investors were forced to either transfer their shares to the brokers’ account or give power of attorney (POA) to the broker. Unfortunately, that led to a lot of brokers cursing the POA.
- In case of any sale/purchase of shares, brokers are required to collect the margins from investors upfront. A penalty will be levied in case of a failure to do so.
- Brokers can not be assigned the Power of Attorney (POA) anymore. The investors used to give authority to the brokers by way of POA to execute transactions on their behalf. Those days are gone and the POA will not be available for pledging anymore.
- Investors willing to avail margins have to make a separate margin pledge.
What have analysts said about the changes?
“Earlier collecting upfront margin wasn’t mandatory, but under the new system, investors will have to pay at least 30% margin upfront to avail a margin loan,” says Angel Broking. Shares bought today cannot be sold tomorrow. Currently, an investor can use intraday realised profits for taking new positions on the same trading day. According to the new norms, you will be able to use it only after T+2 days in case of equity/stocks once you receive the delivery of shares in your account. Till now, clients needed to meet margin requirements in their account once at the end of the day. But, the new margin rules of SEBI will require them to fulfil their margin obligations at the beginning of the deal.”
“The change in margin system and securities pledge-repledging could undoubtedly bring disruptions in volumes of daily trading as there is insufficient preparation and validation by the participants in this system – viz Exchanges, Depositories, Depository participants, Clearing corp, Brokers and clients. We could witness further polarization of stocks in the markets for some time with the top 200-300 stocks seeing the most depth and liquidity. The securities currently pledged with the brokers need to undergo the new process, which so far is not smooth going by the runs conducted so far. Hence large traders are unsure as to whether they will have limits to trade on Sept 01 which may lead to a volume drop in both Cash and F&O segments that may last a few days/weeks. The short term trend of the markets seems to have turned down.”
Motilal Oswal Financial Services
“Going ahead, the market may remain under pressure due to introduction of new margin requirement in the cash segment from 1st September and geo-political tensions between India-China. Any sharp fall in the market would be a good buying opportunity for long term investors to add quality stocks in the portfolio.”