Cash segment margin trade terms set

Securities and Exchange Board of India (Sebi) has decided to introduce margin trading "" borrowing funds from a broker to purchase stocks "" in the cash segment of equity markets.

In a circular issued on Friday last week, the capital markets regulator said, brokers, who have a net worth of at least Rs 3 crore, can provide margin trading facilities to their clients. Brokers, the Sebi said, may use their own funds or borrow from scheduled commercial banks or non-banking financial companies, regulated by the Reserve Bank of India, to offer margin trading facility.

The regulator said the 'total exposure' of the broker towards margin trading should not exceed the borrowed funds and 50 per cent of the net worth.

"While providing margin trading, the broker has to ensure that the exposure to a single client does not exceed 10 per cent of the total exposure of the broker," the Sebi said. The margin trading facility will be available only for 150 stocks that come under the Group-1 of the Sebi risk management system.

For buying stocks on margin, an investor has to pay 50 per cent of margin amount and the rest to financed by the broker. In addition, the borrower will have to put up a maintenance margin of 40 per cent. In case the margin falls below 30 per cent and the clients fail to bring in the margin, then the brokers can sell the shares in the market, the Sebi said.

Sebi said a broker has to disclose to the stock exchanges the details of gross exposure, including name of the client, unique identification number under the Sebi (Central Database of Market Participants) Regulations, 2003, and name of the scrip.

The stock exchange, in turn, has to disclose the scrip-wise gross outstanding in margin accounts with all brokers to the market. Such disclosure regarding margin trading done on any day shall be made available after the trading hours on the following day.

Under the securities lending and borrowing system, the clearing corporation of a stock exchange would be the nodal agency. However, other agencies are also eligible for this system. The clearing corporation has to be registered as an approved intermediary with the Sebi under the securities lending and borrowing scheme for handling settlement shortages.

The clearing corporation can borrow, on behalf of the members, securities for the purpose of meeting shortfalls. The clearing corporation can borrow the required securities to meet the shortfall on the day of settlement, for a maximum period of seven trading days, excluding the day of borrowing.

The defaulter selling broker may make the delivery within three trading days from the due date, that is, the settlement date, subject to charges for late delivery as may be prescribed by the stock exchanges.

In the event of the defaulted selling broker failing to make the delivery within three trading days, the clearing corporation has to buy the securities from the open market and return the same to the lender within seven days.