Come January, buying or selling shares will require upfront margin deposit

PALAK SHAH Mumbai | Updated on December 16, 2019

SEBI’s new dictate requires a margin even for selling shares in the cash segment

Come January, retail investors will have to maintain deposit money with their stock brokers to buy or sell shares. As in the derivatives segment, market regulator SEBI has now mandated brokers to collect an upfront cash margin even for simple buying and selling of shares. Institutional investors who treat equity trades as business transactions, including foreign portfolio investors and mutual funds, have been exempted from this rule.

So far, clients did not have to pay brokers an initial amount to deal in the cash market segment as the entire amount was collected on a T+2 (today+2) basis during settlement. But that convenience of payment has now ended with SEBI’s recent dictate, experts told BusinessLine.

“Henceforth, like in the derivatives segment, the TMs/CMs (trading members, clearing members) in the cash segment will also be required to mandatorily collect upfront VaR (value at risk) and ELM (extreme loss margin) from their clients. Clients should ensure that the VaR margins and ELM are paid in advance of trades and other margins are paid as soon as margin calls are made by the stock exchanges/TMs/CMs,” SEBI said in a recent dictate to brokers.

This effectively means that those who deal regularly in the stock markets will have to maintain some deposit money with their brokers, failing which the latter could refuse to ‘even sell’ shares that are already held. Both VAR and ELM could come to around 15-25 per cent of the entire value of trade. Any shortfall in client payments will have to be reported to the exchange in five days from trade.

“The TMs/ CMs have been allowed a period of T+2 days to to collect margin from clients taking into account the practical difficulties often faced by them, only for the purpose of levy of penalty, and it should not be construed that clients have been allowed two days to pay the margin due from them,” the SEBI dictate said.

Clients who make early pay-in of securities, or, deliver the securities on the same day, have been exempted from this rule. SEBI has said that any shortfall in collection of full payment would attract a penalty.

Currently, clearing corporations collect VaR and ELM from brokers for the cash segment by adjusting it against the brokers’ available liquid assets. Collecting the same was left to the brokers. Now, SEBI has said that brokers should collect it from their clients.

Published on December 16, 2019

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