It's margin call time at brokerages

Brokerages are asking their clients to square up their equity market positions built on margins.

They have issued notices to their clients requesting them to settle accounts for the financial year ending March 31 by closing positions built on margins, market sources said.

Though brokerages usually ask their clients to clear the outstanding by the last week of March, the pressure this year is much greater because the market is on a high and trading is in unchartered territory, executives at brokerage houses said.

But most investors are trying to hold on to their positions as long as possible to get a better price for their shares, riding the hope that the Bombay Stock Exchange (BSE) Sensex will cross the 7000 level soon.

"This may create a situation where almost everyone will rush to sell towards the end of the month," a fund manager said, adding that going by the current trend almost all good stocks may get lapped up by foriegn investors.

Brokers are also worried because the market is usually volatile ahead of the expiry of the month's derivatives contracts, which, incidentally, is on ch 31 this time.

A dealer at a big domestic brokerage house said, "Clients are being asked to either square off their open positions or pay up the balance amount and take delivery."

Most brokerages allow investors to trade or buy up to five times the margin money deposited. The amount remains as a deposit with the broker and all profits and losses are settled separately.

The broker usually charges interest for the client's total exposure over and above the deposit amount. This can range anywhere between 15 per cent and 24 per cent, depending on the client's track record and relation with the broker.

Market entities said that squaring up outstanding positions and closing the books keeps brokers' books clean of sundry receivable and payable entries.

Market sources indicated that brokers also make money by selling entries for losses or profits to retail investors and high net worth individuals who are looking to balance their accounts for tax benefits.

Moreover, market entities are also concerned with retail investors buying into small value scrips which may have no intrinsic value.

"While small investors are buying these scrips on the hope of riding the rally, in many cases prices of these stocks have gone up bacause of manipulation and investors may end up burning their fingers," an analyst said.