SEBI’s new guidelines on margin requirement, even for ‘selling of shares,’ will act as a major entry and exit barrier for the retail investor, say experts. The new rule will cause chaos in the share delivery system, which works on the issuance of demat delivery instruction slips, and is largely physical and not digital, they told BusinessLine .

According to experts, maintaining a margin deposit with brokers for merely selling shares, is unheard of globally and could encourage fraud by brokers.

1.5-2.5 per cent margin

SEBI has directed stock brokers to collect an initial margin of between 15-25 per cent, even for simple buying and selling of shares, in the cash segment. So, if a retail investor wants to ‘simply sell shares’ worth Rs 10 lakh, he/she may require to keep between Rs 1.5 lakh to Rs 2.5 lakh as margin deposit with the broker. Alternatively, the investor should maintain a demat account with the broker he or she is trading with so that the broker mark shares for early pay-in. But for safety purposes, most retail investors keep their trading and demat accounts with separate entities so that the brokers do not take undue advantage of shares in their custody. This safety net will now have to be sacrificed. Also, most retail investors transact in the cash market via multiple brokers to cut risk, but they will now be forced to deal with a single entity due to tight margin requirements.

“This is unheard of. To raise liquidity, I have to first keep a deposit with a broker. It is like saying that if I want to sell my house, I have to keep a deposit with the brokers. To raise money, I have to pay money,” said Anil Singhvi, promoter, IiAS, an investor advisory firm.

Also, investors are wary of giving a power of attorney (POA) to brokers who handle their demat accounts. Karvy used the POA to divert client shares. But SEBI new rule will only encourage brokers to have a complete say on a retail investor’s demat account as they will either want margin or POA of a client’s demat. Experts believe that the sole purpose of levying margins should be risk mitigation and, therefore, margins that do not have a significant positive correlation to risk should not exist at all.

“What is the guarantee that a broker will not run away with my margin? Also, effectively, SEBI is forcing me to keep my demat and brokerage with the same entity. This is anti-investor, as I should have the right to choose my options. The new rule on margin will encourage Karvy-like episodes. Where is the credit worthiness of a broker? Who guarantees it?” Singhvi further said.

For investors who want to sell their shares and also save on margin cost, they will have to convince their depository participant (the demat account issuer) to give early delivery of shares. This is a practical problem as demat instruction slips would still be issued in a physical manner and banks holding demat accounts of retail clients charge “extra money for early delivery of shares.” All these norms will only push retail traders and investors into “dabba trading,” where brokers write cut deals on chits of papers, instead of the exchange platform to save on cost and avoid regulatory hassles.

Experts say, the angst against SEBI is that it is making brokers more powerful by handing money and shares of clients despite the recent fraud or it is simply saying that go to a large institutional broker irrespective of higher charges. Most bank related brokers demand full amount in advance before allowing any buy trade in the cash segment. Their online platform charges and procedures are way higher and tedious than those brokers who can place orders merely on a phone call. From January, brokers will have to do margin reporting even in the cash segment, making it tough for retail investors to delay payment even to next day.

“It is a brutal form of regulation by SEBI. Recent broker fraud has highlighted the need for SEBI to work out ways to ensure that brokers do not in any way handle client money. Instead, SEBI has made rules such that brokers will be able to collect ‘interest free’ deposits from clients who want to trade in equity market. Or simply, clients do not trade. Also, the fact that selling of shares requires margin is just plain harsh,” said another investor advisory expert.

Institutional investors who treat equity trades as business transactions, like foreign portfolio investors and mutual funds have been exempted from this rule.

“SEBI is telling retail investors to go to mutual funds; direct trading is only for institutional players. One rule for the retail investor and another for institutional investors and foreign portfolio investors does not ensure a level playing field,” a practitioner of SEBI law for over two decades told BusinessLine .

The view is that standalone brokers will be pushed out of business due to SEBI harsh margin norms and brokers linked to banks and large financial institutions alone will survive. That too is risky given the recent collapse of IL&FS Securities, which had given client securities as margin to exchanges.

According to legal experts, SEBI should tighten the checks and balances at the exchange and clearing corporation to check broker fraud and mishandling of client money end, but instead the regulator it making it difficult for retail investors to deal in equity markets with each passing day. Exchanges are supposed to regulate brokers and regularly inspect them despite which they missed the fund diversion by Karvy and other brokers.

SEBI has already made it difficult for retail investors to trade in the derivatives segment by increasing the lot size of contracts to five lakhs and more.

Last year, ANMI, the NSE brokers’ association, had protested against SEBI’s tough margin regime in the derivatives segment. ANMI had said many components of margin were unwarranted, excessive, and had little or no correlation to risk and, therefore causing unprecedented damage to the functioning and growth of the equity derivatives market.