Margin trading from Feb 1

The board of the Securities and Exchange Board of India (Sebi) has approved the introduction of margin trading and lending of securities. Both initiatives were expected to be introduced from February 1, 2004, Sebi Chairman G N Bajpai said at a media conference today. The official notification is expected to be issued soon.

The margin trading scheme, as approved by Sebi, envisages an initial margin payment of 50 per cent, with the maintenance margin at 40 per cent.

That is, if the margin paid by the client falls below 40 per cent, the broker can call for higher margins. If the margin falls below 30 per cent, the broker has the discretion of liquidating the client's holdings.

To start with, only corporate brokers with a minimum net worth of Rs 3 crore have been allowed to offer margin trading to their clients.

Margin trading will be allowed only in the top scrips, taken from the BSE's A group, that is, those with a impact cost of less than 1 per cent which signifies high liquidity, Sebi said.

Brokers can lend from their own resources or can borrow from banks, non-banking financial companies (NBFCs) and other qualified lenders such as insurance companies.

However, the broker can only borrow up to five times his net worth. The broker, of course, cannot use the funds of other clients or individuals.

Sebi has called for stringent disclosures, both with regard to the exchanges as well as clients.

To the exchanges, brokers have to disclose client-wise, scrip-wise, position-wise gross exposure limits. They will also have to maintain separate client-wise accounts of all the securities against which loans have been advanced and this should be made available to the client at any point of time.

When asked whether the new scheme had any similarities with the erstwhile badla, Bajpai said this scheme would come with proper risk management systems in place and stringent disclosure norms.

Lending of securities to brokers will be done only by the clearing corporation of the exchanges but institutions and individuals can make their securities available to the exchange.

Bajpai said that there was no restriction on who can lend, only that it has to be routed through the exchanges. The current stock lending scheme of institutions such as Stock Holding Corporation will continue.

The new lending scheme will have nothing in common with the previous Automated Lending and Borrowing System of the National Stock Exchange (NSE).