The much-expected infusion of funds into the stock markets through the system of margin trading is likely to come a cropper with no takers within the Reserve Bank of India (RBI) for the idea of banks and financial institutions advancing funds.
Purchasing securities by borrowing a portion of the transaction value and using the securities in the portfolio as a collateral is called margin trading.
According to sources familiar with the development, very little headway is being made in this respect as within the central bank there is considerable resistance to the idea of allowing the banks to finance stock market transactions in a direct way.
"Whether it is carry forward or margin trading, ultimately the bottomline is that banks funds will be channeled into the market," said sources, pointing out the risk involved in the business.
When Sebi announced a proposal to introduce margin trading earlier this month in deference to the pleas made by the broker community -- which has been hit by low volumes and poor liquidity -- the market reacted to it positively.
According to the proposal made by the markets regulator, the bank funds would be channelled through clearing houses of stock exchanges.
This issue was also discussed at the high level capital markets meeting between RBI, Sebi and representatives of the finance ministry. However, there are a number of issues which RBI would like to have cleared including its impact on banks' equity exposures. Recently the RBI released a new set of norms for banks exposure to shares.
The central bank is also looking at other aspects like the safeguards for banks and whether banks would be lending in an individual capacity or the funds would flow into the market from a common pool.
Another issue to be resolved is that of electronic funds transfer which RBI expects to come into operation late next year.
Sebi's argument is that providing finance for margin trading is strictly a loan-based transaction and not a deferral product such as carry forward was. Trades have to be squared up within the same day. The only advantage will be that the trader will not need to block his entire funds but trade on basis of payment of a margin.
"When the entire exercise of the evolving new norms is geared towards minimising risk in the marketplace, we find it strange that banks should be asked to lend themselves to more risk by financing such transactions," sources pointed out.
