Cautious welcome to margin trading

The introduction of margin trading by the Securities and Exchange Board of India (Sebi) has been greeted by cautious enthusiasm by brokers.

The reporting requirement, monitoring of limits are issues which need more clarification, according to brokers. Sebi has said that it will issue a circular on this shortly.

Deena Mehta, managing director of Asit C Mehta Securities said, "We are not ready for this sort of a product at the moment," and "it is not suitable for Indian conditions."

Incidentally, margin trading has been on the `most wanted' list of brokers for the last three years with their client base increasing.

In fact there is a lot of unofficial margin trading going on with brokers extending the facility to their clients on trust basis.

Moreover, the introduction of margin trading is an essential pre-requisite to the physical settlement in the derivatives segment.

Mehta also said that if pricing is left to individual brokers or lenders "the rates are likely to be very high. This will make margin trading unviable."

Pashupati Advani, director of Advani Sharebrokers said, "It should have come earlier. It is the first step in the right direction and should have come 2000 points earlier when it was first required."

There is a lot of scepticism from some quarters at the introduction of margin trading at these levels, as the fear is that the market will become unnecessarily overheated.

In fact when Sebi chairman, G N Bajpai was asked whether it was the right time to introduce margin trading, he said that the idea was to spread the risk.

"I have learnt it from the insurance industry that risk should be as widely spread as possible." The regulator will be reviewing the scheme after six months of its introduction.

Bajpai today announced to the press that the regulator had approved the introduction of margin trading and securities lending scheme from February 1, 2004.

Clients will have to pay an initial margin of 50 per cent with a maintenance margin of 40 per cent.

Only Indian corporate brokers with a minimum net worth of Rs 3 crore would be permitted to run margin trading.

Motilal Oswal of Matilal Oswal Securities said that it was a welcome development as there is no organised mechanism for margin trading at present.

Sebi officials said that since a lot of unofficial margin trading was going on - either financed by brokers or corporates - this was one way of bringing in everything out into the open and making it transparent.

In fact, the bull run has given rise to rampant financing with even portfolio managers financing their clients to invest in equities.

The Reserve Bank of India has introduced a system of margin trade financing by banks but it has failed to take off precisely because of the lack of a comprehensive risk management system on the part of brokers.