How a SEBI circular on ‘unpaid shares’ could lead to heavy market selling

PALAK SHAH | | Updated on: Sep 04, 2019

Out of the ₹1 lakh crore worth of pledge shares, 25 per cent could be unpaid shares, say brokers

Small and mid-cap stocks worth thousands of crores that are lying with the stock brokers because clients have not paid full amount for purchasing them, could come for selling in the market as a consequence of a recent SEBI circular.

SEBI has said that with effect from November 1, brokers will not be able to keep ‘unpaid shares’ in various accounts or even pledge them.

It is learnt that in many cases, even shares lying with brokers are those where clients have availed margin funding but are also classified as ‘unpaid shares.’

Most high net-worth individuals (HNIs), some of whom are also big market makers and operators in many counters, buy shares with margin payment of only 10-20 per cent. The rest is financed by the broker, who pledges these shares further with a Non-Banking Finance Company (NBFC) and earns the difference between borrowing and lending of 80-90 per cent margin money. Now, all such shares will have to be offloaded in market due to the SEBI circular, brokers told BusinessLine .

Also, there are instances where HNIs do not pay the entire amount due on shares, but are comfortable with the broker imposing interest on the amount ‘unpaid’ and shares are lying with the broker. Such arrangements will not work now.

Data collected by brokers show that as per exchange website, the amount of pledge shares stood at around ₹1 lakh crore, which belongs to non-promoter and retail segment. Brokers say they have conducted an internal survey, and believe that around 25 per cent or more of these share pledges are unpaid shares.

‘Extend the deadline’

Brokers, who made a representation to SEBI, told BusinessLine that they have requested SEBI to extend deadline of the circular by few months, otherwise it may lead to heavy selling. Already, brokers are staring at a huge loss on unpaid shares, as the value of these shares fell sharply in the recent market crash, and clients were not willing to fulfill their payment.

“Securities lying with TM/CM (trading member/clearing member) in a client collateral account, client margin trading securities account and client unpaid securities account, shall not be permitted to be pledged/transferred to banks/NBFCs for raising funds,” SEBI circular said.

The circular was to be implemented from September 1, but SEBI extended the deadline by a month.

“SEBI will appreciate that insistence on implementing the circular may drastically disturb the market equilibrium as the entire system may not be able to withstand stress of un-pledging such huge quantum of pledged shares of non-promoters. Practical reality is that large quantum of shares in respect of non-promoters would be pledged with NBFCs and banks through member brokers. In the interest of the equilibrium of the market, we request SEBI circular be kept in abeyance and provide reasonable time to complete the process of opening the accounts of clients with the NBFCs and banks,” a note by a brokers to SEBI said.

Published on September 04, 2019
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