Brokerages lukewarm to margin trading

Only 10 of the 550-plus brokerages apply to the bourses for offering the facility

Four years after the infamous automatic borrowing and lending mechanism (ALBM) and its variants were scrapped, a much more secure version is finding few takers.

It has been three weeks since margin trading was officially introduced by the Securities and Exchange Board of India (SEBI), but only 10 of the 550-plus corporate brokerages have applied to the Bombay Stock Exchange (BSE) for permission to offer margin trading to their clients.

At the National Stock Exchange (NSE) the number is even less, with sources suggesting the number on registered members in single digits. An NSE spokesperson confirmed that there were "a few applications", but refused to reveal the exact details. Even BSE officials refused to confirm any numbers or names.

The market's lukewarm reaction to margin trading comes as a surprise, especially since the players had been demanding an alternative to the ALBM system, famously scrapped in 2000.

Margin trading was expected to be the state-of-the art solution, as it provided far greater transparency, in that client-wise, scrip-wise positions were to be reported to the bourses.

Moreover, margin trading is a quantum leap ahead of the old badla and ALBM systems as it has better risk management built in. With higher margining provisions, it was a safer product in the markets, and brokers were secured since they were given the right to sell shares in the case of non-payment of incremental margins.

But for all the demands and many committee deliberations, only a few big brokerage houses, such as Kotak Securities, Motilal Oswal Securities, Anand Rathi Securities, Emkay Shares & Stocks, Refco Sify Securities, have confirmed having applied to the BSE.

HDFC Securities and SSKI said they are looking at the finer details and are in the process of applying. ICICI Webtrade, UTI Securities, and Sunidhi Consultancy are also understood to have applied but were not available for comment. There are 551 corporate members at the BSE and 765 at the NSE.

Motilal Oswal of Motilal Oswal Securities said, "We have applied for margin trading because it looks like a good product. But the practical implications need to be seen." Kotak Securities' managing director, S A Narayan, also confirmed that the brokerage had applied for permission with both the exchanges.

Others, such as Emkay Share and Stocks, Anand Rathi Securities and Refco Sify Securities, have also individually confirmed that they have registered with the BSE, while Shankar Vailaya, director operations, SSKI, said, "We are in the process for applying for an approval.

Markets sources said the initial response had been less than expected because most brokers are not yet clear on the finer details of the working of the scheme.

Rajeev Sampat, director, Parag Parikh Securities, said: "We will be looking to apply for margin trading only after we are certain of the working of the scheme, the implications for brokers and the rights and obligations of brokers vis-...-vis the client."

The Sebi has allowed member-brokers of the exchanges to provide margin-trading facility to their clients, in the cash segment.

The capital markets watchdog said trading members who want to provide margin trading would be required to comply with the norms prescribed by the regulator, and the relevant exchanges which include trading members reporting the details of gross exposure to margin trading on the exchange on a daily basis and a net worth of at least Rs 3 crore.

Sebi has categorised the securities available for margin trading in three groups. Securities that have a mean impact-cost of less than or equal to one, and are traded on at least 80 per cent of the days in the previous 18 months, have been categorised in the first group and would be eligible for the margin trading facility.

The initial and maintenance margin for the client shall be a minimum of 50 per cent and 40 per cent, respectively, and this is to be paid in cash. The broker may liquidate the securities if the client fails to meet the margin calls on the stock or where funds are short.

A broker may use his own funds or can borrow from a scheduled commercial bank or a non-banking financial company, regulated by the Reserve Bank of India, for the purpose of providing margin trading facility.