The Hindu Business Line : Margin-trading norms being reviewed: Bajpai

THE Securities and Exchange Board of India (SEBI) is reviewing margin-lending norms to generate better response to the system. The qualifying criteria for participation in Indian depository receipts (IDRs) would also be re-looked before the guideline are finalised, said Mr G.N. Bajpai, Chairman, SEBI.

The regulator had announced a margin-trading and stock-lending scheme in January to improve liquidity and increase the depth of the market but drew a lukewarm response from brokers. According to stock exchange sources, they have received only a handful of applications to use the service.

"The guidelines are coming up for review at the end of six months of implementation. We will look at it with a view to making it more streamlined," Mr Bajpai told Business Line.

The sources said the number of brokers who have applied for this facility is a "low single digit" percentage of the total number of registered brokers.

Margin trading allows investors to buy stock by paying only a part of the value with the rest being financed by the broker. Such financing helps investors leverage their funds several times over. Brokers can borrow funds from banks and RBI-registered NBFCs and on-lend these to clients.

The new regulations require borrowers to put up a maintenance margin of 40 per cent. Brokers also have to disclose details of margin trading to the stock exchanges and the entire market would subsequently be informed. These borrowing and disclosure norms are too stringent for brokers, reasoned a market participant about the poor response to the facility. The draft guidelines for IDRs, especially the qualification criteria, will be reviewed, said Mr Bajpai. The current recommendations suggest that only qualified institutional buyers and investors who would invest at least Rs 5 lakh be allowed to subscribe to IDRs. This effectively rules out retail investors' participation in IDRs.

Mr Bajpai said that as IDR is a new instrument, it is better that only large investors with higher risk-taking ability are allowed. It would help insulate retail investors from risks, if any, at the teething stage.

"This is the reasoning behind the criteria, but this would be reviewed before the final guidelines are published. If market comments indicate that this should be extended to other participants also, then we would do that. We have gone beyond the recommendations many times in the past," he said.

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