The Hindu Business Line : Brokers lure retail investors with margin funding — Banks extend personal loans for share purchase

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Brokers lure retail investors with margin funding — Banks extend personal loans for share purchase

Veena Venugopal

Mumbai , May 19

IN a bid to increase their retail business, broking houses are aggressively pushing the margin-funding option to retail investors.

With the equity markets awaiting triggers and moving in a range-bound manner for the last few months, brokerages are running out of options to attract new investors as well as increase the business from their existing ones.

Banks as well as some large broking houses are also offering personal loans to investors against the purchase of shares in the equities market.

While brokerages such as Motilal Oswal Securities, Kotak Securities and others are understood to be stepping on the gas in providing margin funding to more and more investors, others such as Karvy Securities are understood to be launching the service soon.

Under margin funding, the client normally has to pay only 40-50 per cent of the total value of purchase of each scrip, with the rest being provided by the broker. The investor has to pay an interest charge on the money brought in by the broker. Interest rates vary between 12 and 16 per cent per annum. If the investor is unable to meet the ongoing (or maintenance) margin requirement, the broker has the right to sell the scrip and liquidate.

Though brokerages officially claim that margin funding is made available only to specific clients who are aware of the legalities and risks involved, officials concede that in the last couple of months most customers have been approached with this option.

Markets have had a steady climb till January 2005. Investors, especially retail investors, who tasted some profits, were willing to take risks on larger sums of money. But with the current tepidity in the bourses, investors are either booking profits and staying away or staying invested without any fresh inflows. This has forced brokerages to get aggressive by providing funding options, said the retail head of a brokerage.

Broking houses see margin funding as an area that would help boost their bottomlines. This also helps them morph into a one-stop-shop for the investors.

However, compared to high net worth individuals, opting for margin funding by retail investors is a more risky proposition, according to financial advisors. Retail investors may not understand all the risks involved. If stock prices fall, investors could end up losing much more than their capital, they say.

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