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The margin trading business has taken a hit, following an increase in the number of stocks in the futures and options (F&O) segment.
Since 2007, the number of actively traded stocks in the derivatives segment has seen a jump of to 224, from 145 in 2007. In this period, margin trading, a leveraging mechanism in which investors borrow money from brokers to take exposure in a stock, has seen a 77 per cent drop, shows data from the National Stock Exchange (NSE).
As of December 2014, the amount funded under margin trading was Rs 60 crore, as opposed to Rs 268 crore as of December 2007.
According to sectoral officials, an increase in stocks in the derivatives segment has an inverse relation to margin trading activity. “This happens because investors prefer to take exposure through the F&O segment than approach the broker for funds to increase their holdings,” said B Gopkumar, head of broking, Kotak Securities.
The total number of stocks available for trade in the F&O segment was a little over 500 as at end-June 2014. Half these stocks are actively traded.
The rise in the number of stocks in the F&O segment has been largely due to increasing market capitalisation. Also, the need for algo or high-speed trading pushes demand for more stocks in the derivatives segment.
The margin business for brokerages saw its peak in 2007, when the secondary markets were surging and primary markets were ripe with activity, said those in the sector.
Buying on margins is particularly popular during the Initial Public Offering (IPO) period. Investors, especially the high net worth ones (HNIs), prefer the margin funding route.
The lull in the IPO market has also been a reason for the drop in margin trading. Data from Prime database shows FY08 had a total of 90 public issues, largely through the IPO route, whereas only 26 public issues were launched in FY15 (as of December 2014), a large proportion of which were through the Offer For Sale route.
“For margin trading to pick up again, we will need the big-ticket IPOs like the ones we saw during the bull run of 2007. With the government talking about disinvestment in public sector units, we expect higher participation in margin trading from retail, especially HNI, investors,” said Varun Goel, head of portfolio management services at Karvy Stock Broking.
The decline in margin trading was also attributed to the Reserve Bank restricting the practice of lending against shares by non-banking financial companies (NBFCs), in an order issued in August last year. Those in the sector said the NBFC route was being used by brokerage firms with their own NBFC arms.
The broker would provide a loan to clients pledging shares with the NBFC, wherein the loan would be as high as 70 per cent of the total value of the share. The new rule limits the amount that can lent to 50 per cent, in line with the margin funding norms of the Securities and Exchange Board of India (Sebi). It has also introduced restrictions on the type of securities against which lending can take place.
“The RBI ruling has been a dampener on the margin trading business of brokerages, putting it at par with the Sebi norms. And, margin trading as defined by Sebi has found few takers in the sector, as it is very restrictive,” said the head of a domestic brokerage.
However, margin trading has been on the rise in the past one year, with the amount traded up about 50 per cent in 2014, shows data from the NSE.
