The Hindu Business Line : Institutional investors must pay margins: SEBI

Mumbai, March 19 Institutional investors will now have to pay margin on their share transactions in the cash segment from April 21, in the same way as applicable to other investors, the Securities and Exchange Board of India said in a circular issued on Wednesday.

SEBI also operationalised short selling and securities lending and borrowing from the same date, April 21. It had specified the broad framework for this in December 2007 but had not operationalised it, pending clarifications from the tax authorities.

Currently, margin payment in cash transactions is applicable to retail investors and to those who do proprietary trading. It is a percentage of the value of the stocks that investors have to pay upfront upon placing their order with their brokers.

This is being done “in order to provide a level playing field to all the investors in the cash market as in the case of the derivatives market,” said SEBI.

While some market players thought that this margin prescription for institutions was done keeping in mind the current fragile health of several financial institutions worldwide, sources close to SEBI said that the measure was thought about a long time ago.

This must be seen in the context of short selling and securities borrowing and lending being made operable from April 21, said a source close to SEBI.

“This has been done for greater balance and integrity in the markets,” he said. “With short selling we are encouraging a converse view of the market, and we feel that margins for cash trades provide a balance.”

“There is a fear that people may go berserk with short selling and exceed their limits,” he added.

All institutional trades in the cash market would be margined on a T+1 basis with margin being collected from the custodian upon confirmation of the trade, said the SEBI circular: “Subsequently, with effect from June 16, 2008, the collection of margins would move to an upfront basis.”

The stock exchanges shall issue the necessary guidelines in this regard and shall put in place the necessary systems said SEBI.

“Institutional investors will now have to make arrangements to pay margins. From a broker’s perspective it would be like handling retail trades and paying margin money to the exchanges. If brokers can collect money from custodians there is no extra cost, it is only an increase of administrative work,” said Ms. Anita Gandhi, head of institutional business at Arihant Capital Markets.

There could be a slight decrease in volumes, but in any case the margin money will be released on the T+2 date, said an official at a mutual fund.

Short selling by institutions resuming next month will help deepen and broaden the market, said analysts. Short selling had been banned by the regulator in the wake of the Ketan Parekh scam in 2001.

Short selling refers to the sale of stocks which the seller does not own at the time of selling.