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SEBI to usher in margin trading — Stock lending, borrowing system to be introduced

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Mr. G.N. Bajpai, Chairman, SEBI, with Mr Pradip Kar, Executive Director, at a press conference held in Mumbai. - Shashi Ashiwal

Mumbai , Jan. 7

IN a bid to impart liquidity and further increase the depth of the equity market, SEBI has decided to introduce margin trading and stock lending and borrowing system.

Speaking to newspersons on Wednesday, the SEBI Chairman, Mr G.N. Bajpai, said that the decision was taken when the board met in Kolkata on Tuesday.

A detailed notification regarding the modalities of the scheme will be issued shortly, he added.

Margin trading allows investors to buy stock by paying a part of the value with the rest being financed by the broker. Such financing helps investors leverage their funds several times.

In securities borrowing and lending systems, a player in the market who has sold shares without holding securities (short-selling) borrows securities from others and delivers the shares to the buyer.

Under the new margin trading, a broker can borrow funds from banks and RBI-registered NBFCs and on-lend these funds to clients.

The new system is different from the prevailing margin trading norms where banks are allowed to lend only to brokers, but brokers in turn cannot on-lend the funds to clients.Under the proposed system, only corporate brokers with minimum net worth of Rs 3 crore can undertake such activities; they can lend up to five times their net worth.

For margin trading, a client has to pay 50 per cent margin, while the rest is funded by the broker.

In addition, the borrower will have to put up a maintenance margin of 40 per cent.

This means that if an investor buys shares worth Rs 100, he can borrow up to Rs 50 and in case the stock price falls to Rs 80, the margin of the investors falls to Rs 30 or 30 per cent.

For this interim period (T+1), he has to pay an additional Rs 10 to keep it at 40 per cent and subsequently increase the margin to 50 per cent. In case the margin falls below 30 per cent, the broker can sell the shares.

However, the facility of margin trading will be available only for stocks in Group-1 of the SEBI risk management system, numbering around 150.

Mr Bajpai said that the margin system was not similar to the banned carry forward system or badla. "It is a totally transparent and internationally accepted system."

Each broker has to disclose details of the margin trading to the stock exchange, which in turn would be informed to the entire market.

On the securities lending and borrowing system, he said that clearing corporations of the stock exchange would be the nodal agency.

"Anybody can go to the clearing corporation for lending or borrowing of securities," Mr Bajpai added.

In the earlier system, there were several agencies such as Stock Holding Corporation of India for securities lending, but they used to lend only to select investors, due to which the system was also not successful.

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