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Wednesday, Aug 20, 2003

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Brokers may be allowed to obtain banks funds for clients: SEBI panel

Our Bureau

Mumbai , Aug. 19

A SECURITIES and Exchange Board of India committee has suggested a more market-friendly margin trading system where brokers act as facilitators of funds from banks and non-banking finance companies to their clients for buying stocks.

In the present system, banks fund brokers for margin trading but they cannot on-lend it to their clients and due to this the margin trading did not take off in India.

The SEBI's secondary advisory market committee headed by Dr R.H. Patil, Chairman, Clearing Corporation of India, said brokers would bring borrowers (clients) to the lenders (banks and NBFCs) and borrowing would not be reflected in the balance sheet of the broker.

For margin trading, the existing risk containment measures will continue. According to the committee this model can be launched immediately since it does not require any legal amendments.

Brokers financing their clients directly for margin trading are also favoured by the committee. However, it feels that this model can be introduced only after making legal changes.

SEBI's secondary advisory market committee has also recommended that the existing stock lending by approved intermediaries be continued. The committee also proposed that the securities lending for meeting the settlement shortages by clearing house or clearing corporation may also be considered.

The committee said that the existing scheme, where registered market intermediaries lend the shares, may be allowed to continue for a period of six months and the feedback thereon may be obtained from the participants before revisiting the scheme.

On the issue of short sales, the committee said that the current definition needs to be changed with short sales defined as `failure to deliver securities at the time of settlement'. This change has been suggested due to the introduction of shorter settlement cycle of T+2.

At present, short sale is defined as selling of the shares without having the physical possession of the shares unless it is either for squaring-up of an earlier purchase in the same settlement of the same stock exchange or against the pending deliveries from the same stock exchange pertaining to previous settlements.

On short sales, it said that short sales be regulated by putting in place a sound and efficient securities lending and borrowing mechanism. The committee said short sales be defined as failure to deliver securities at the time of settlement and should be monitored at the time of delivery in the settlement.

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