New share margin, pledging framework kicks-in today; how it will affect your stock market trading

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September 1, 2020 9:40 AM

From today, Securities and Exchange Board of India’s (SEBI) new margin rules come into effect, as the market regulator attempts to increase transparency and safeguard investors.

 

The market regulator SEBI is set to bring about two changes from today. The first one will deal with how traders pledged shares, and the second deals with upfront margin payment on buying or selling of shares.

From today, Securities and Exchange Board of India’s (SEBI) new margin rules come into effect, as the market regulator attempts to increase transparency and safeguard investors. Ironically, analysts are attributing the same rule as partly the reason behind yesterday’s 839-point slump in Sensex from intraday high. Apart from the various challenges that the new margin rules bring, it is also expected to cause a reduction in trading volume on the stock exchanges. The new rules come into effect today, after SEBI refused to extend the implementation deadline yesterday.

What was the old way?

The market regulator SEBI is set to bring about two changes from today. The first one will deal with how traders pledged shares, and the second deals with upfront margin payment on buying or selling of shares. In the old way, if traders were to provide shares as margin for trading, they had to either transfer shares owned by them to the brokers’ account or give their broker power of attorney.

On the other hand, the margin requirement for buying or selling securities in the cash segment was not a concept so far. Earlier if an investor bought securities the amount was deducted from the account on the day of delivery of the securities.

What will happen now?

In the new system of pledging, the pledged shares remain with the traders in their demat accounts. This would make them eligible for all corporate benefits aligned with the securities. The new rules will see inventors give their consent for creation of margin pledge through entering an OTP on the depository’s website, which will then be marked in favour of the broker. The stock broker will now be asked to open a separate demat account where the securities will be transferred and then the broker will re-pledge the said securities to the Clearing Corporation to obtain margin. This will require stock brokers to revamp their system to facilitate the new trading norms. Additionally, market participants believe that it will cause heavy selling as traders shift to the new system.

On the upfront margin payment, a trader looking to buy stocks from today will need to pay 20% upfront margin to avoid any penalty. Similarly, when traders look to sell their shares they will again need a 20% upfront margin. “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,” said Deepak Jasani, Head of Retail Research, HDFC Securities.

Yesterday, Association of National Exchanges Members of India (ANMI) met SEBI officials, in an effort to delay the implementation of the new rules, but could not find the solution they wanted. “This came as a big surprise to ANMI and its  900 members. ANMI is holding consecutive meetings with all stakeholders and studying all options available to it in the matter,” a spokesperson for ANMI said.

What are the challenges?

In a submission to SEBI on Friday, ANMI had said that there are various issues that remain to be dealt with ahead of the implementation of the new rules. ANMI said that most of its 900 members have confirmed that repledge could not be initiated at all in both the depositories. The traders body highlighted that issues could emerge at CDSL and NSDL level, including delayed OTP response.

ANMI said that back-office software vendors have been struggling with revamping their softwares to pave the way for a smooth transition onto the new system. “The implementation of new system if not postponed is likely to result in market disruption, as operations at the depositories have not stabilized besides there is mismatch noticed in UCC database which is required to be corrected before the process is started and if it is not attended on priority it is likely to hamper the process of smooth pledging/re-pledging of shares,” ANMI said.

The new system was to be implemented by June 30 but the same was extended twice owing to the coronavirus pandemic. The move comes as SEBI aims to tighten the norms around stock brokers after the Karvy Stock broking episode.

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