Sebi's new margin norms will be painful for investors, market participants

In November 2019, the Securities and Exchange Board of India (SEBI) introduced a framework of margin collection in the cash segment where one needs to pay for the securities purchased within two days to the stockbroker. Till November 2019, the margins from clients were mandatorily required only in the Futures & Options (F&O) segment. For the past several years, these cash margins were not demanded from clients and were borne by their brokers. The market regulator, however, tightened the margins norms due to the misuse of securities by a few unscrupulous brokers in the industry. These new norms also brought along multiple challenges for investors and stockbrokers alike.

Come September 1, stockbrokers will have to report the upfront margin collected and available with them from their clients – both for sell and buy trades, and failure to do so will attract a penalty. The stocks lying in the investors’ demat account, which were equivalent to margin available till now, will now be replaced with the pledging of these shares to the broker.

Simply put, the new regulations stipulate that all investors need to bring in upfront margins for selling their stocks or for making any purchases. Typically, an investor selling shares to raise money is now subject to upfront margins before the execution of the trade. The securities lying in the demat account are no longer sufficient to be reported as margin available. The shares also need to be delivered on the same day, else it will be subject to penalty. Currently, the Exchanges have a T +2 settlement cycle (T being the trade date), where the investor can deliver securities till T+2 days, yet the insistence of same-day delivery is intriguing and unfathomable. More so when the statistics on NSE website itself suggest that not more than 0.20 per cent of the deliverable trades result into auction, which amply substantiates that most delivery-based trades result in genuine delivery of shares.

Another googly is the disallowance of the value of shares sold against the purchase of another security. Suppose an investor wanted to sell Stock A and buy Stock B. It is typical of investors to sell a particular stock and use the proceeds to buy another stock. The margins of sale of stock A could be covered by giving delivery on the same day but for buying Stock B, the investor will now have to cough up a fresh margin, either through payment or pledge of other shares to the broker. This was not the case earlier as the expected proceeds of the sales were sufficient to cover the margins for both legs of the transactions. Bizarre, but true!

That apart, till now, the stockbrokers used to pull the shares from their clients' demat account on the basis of Power of Attorney (POA) as client’s collateral. This system is known as Title Transfer (TT). Based on the collaterals with them, the stockbrokers executed trades in the derivatives or cash segment for their clients. SEBI has now disallowed the system of TT and POA due to misuse by few and made it mandatory for the shares to reside in the investors account and pledge it to the added layer of a SMS / E-mail link and one-time password (OTP) to clients to confirm the pledge leaving the onus on clients. However, the pledge mechanism of depositories is not yet operational. This has led to all in the ecosystem grappling in the dark. The investors, too, have not yet been educated about the new system. Everyone seems to be clueless with little time to develop and test the systems with the impending deadlines. The high pledge charges per scrip of depositories is another dampener adding to the cost of transactions of the investor.

Another thorny issue is the cascading margins on the popular trading pattern of short-term traders who use the facility of “Buy Today, Sell Tomorrow’, commonly called as BTST. In spite of the trade being squared off (effectively near zero risk) on the next trading day, the trader is subject to dual margins, both on the buy and sell transactions. This is further compounded when there is fresh buy trade against the squared trade, tripling the margins. Another recent SEBI circular on intraday margins and margin trading also has the potential of deeply impacting the trading volumes in the next one year, which is a different point of discussion.

SEBI needs to seriously relook at the methodology and approach of the levy of margins on clients and their penal provisions. It needs to consider margins on ‘net long’ or the portfolio approach. A recent relook by SEBI in the approach of levy of margins in the derivatives segment led to a substantial reduction of margins on hedged positions. All these measures have created heartburn amongst market participants and will inflict more pain if implemented in the current form from September 01.

The author is on the Board of Association of National Exchanges Members of India (ANMI). Views expressed are personal.