Markets

Brokers urge SEBI to review new margin rules for equity segment

PALAK SHAH Mumbai | Updated on January 02, 2020 Published on January 02, 2020

The regulator has reversed the 14-year practice as upfront collection of margin in cash segment kicked-in from January 1

A large number of retail clients and brokers are yet to gear up for SEBI’s new margin norms that came into effect from January 1, with regard to the cash segment. A representation made by brokers to SEBI has highlighted several practical problems in immediately adjusting to SEBI’s circular.

According to a recent circular, even selling of shares would require clients to deposit prior margin with the broker, which was not the case so far. The regulator changed a 14-year-old practice of buying and selling of shares for a large number of retail players in India’s market. The circular was issued by SEBI on November 20, 2019.

Brokers are calling up their clients and asking them to shift their demat accounts to the brokerage or be ready to deposit initial margin money to avail any kind of buying or selling limit. If a client has a demat and trading account with the same broker, margin for selling of the shares may not be required.

Data from depositories NSDL and CDSL show there are nearly four crore demat accounts. A large number of these investors kept their demat and trading accounts with separate entities for safety purpose.

For instance, a demat account of a retail player would rest with a nationalised bank but he would prefer to trade with a broker around the corner. This was to avoid any potential Karvy-like episode, where the broker used client shares lying in its demat to further pledge them. Not only Karvy, even an institutional broker such as IL&FS Securities had deposited client shares for margin purpose.

BusinessLine first published the story on December 16 on how SEBI’s new margin norms are entry and exit barriers for retail investors

Problems for NRIs

Brokers said that for non-resident Indian (NRI) and persons of Indian origin (PIO) clients, the new norms virtually shut the door to the market. “The reason is that banks who act as authorised dealers for such entities release the payment only when they are shown contract notes or broker bills post the transactions. Now, with SEBI’s circular, banks will not agree to release upfront payments and may require to change their procedures too,” said a broker on condition of anonymity.

“The SEBI circular does not specify the amount, margin, or form in which it has to be collected. It has been left to the discretion of the broker and many may apply their own parameters. The circular forces brokers to mechanically follow the margin collection process,” the broker added.

Connectivity concept

Another broker said that the concept of last-mile connectivity of broker with clients and the problems it would face has been ignored. “There are brokers who deal with clients on a franchise model, which specialises in providing customised services. But since clients will be forced to open a demat account with them, they would rather prefer to move to an online broker. For small brokers the cost of operations too would go up due to the daily reporting of margin,” said an industry representative.

Published on January 02, 2020
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