Updates

Decoding: New Margin Pledge Rules of SEBI

New Rules For Margin Pledge/Repledge of Shares

What has changed after September 1?

Protecting the interests of the investors has always been the prime objective of SEBI. Working conscientiously towards the fulfillment of this objective and to prevent brokerages from misusing client’s securities, SEBI has rolled out a new set of regulations pertaining to upfront margin requirement for trade-in cash segment and method of pledging of securities as margin; both of which will come into effect from 1st Sept 2020 onwards in a phased manner.

What is margin and how it will affect the way you trade?

Margin is a popular tool used worldwide by investors to leverage their position. It is like a loan facilitated by a brokerage firm to investors to purchase securities of a higher value than the capital available with them for trading.

Until now ( i.e. 1st Sept 2020  ) upfront margin collection i.e payment of margin before the execution of trade was not required on behalf of the investor for the trading of securities in the cash segment, as cash margins were looked after by the broker which allowed investors to amplify their positions but with effect from 1st Sept, SEBI has mandated the collection and reporting of margins even in cash segment. This mandate is already in place when dealing in the F&O segment and henceforth will be applicable to cash trade also. The new mandate applies to both intraday and delivery trades.

A margin equivalent to VAR +ELM will be required to be maintained for all transactions.The said margin can be paid in the form of cash, shares, FD’s, BG’s and other approved collaterals.

Upfront margin will be required for both buy and sell trades and will stand relevant even in case of BTST ( buy today sell tomorrow) transactions. This implies that to sell share on the very next day of buy trade an investor will need a VAR +ELM margin in his account.

Also an important aftermath of these regulations would be that investors will not be able to use the proceeds from sale of the stocks until T+2 days unless the designated broker does early pay-in to the exchange in case of sale of securities  We at Arihant, are glad to have implemented the new procedure for our clients.

SEBI has also put in place a system of penalties to ensure compliance of the policies. Failing to fulfill margin requirements will attract penalty. A short margin penalty on non-compliance of margin requirements will be levied on intraday trade from 1st Dec 2020 and for delivery trades, it will be at play from 1st Sept 2020.

To know more about new Margin in Cash Segment Rules, click here.

 

Pledging of Securities:

The other major change rolled out by SEBI pertains to the pledging of securities.

Margin trade requires payment of an upfront margin before the execution of trade; this margin can be in the form of cash or existing securities.  To use existing securities held by the investor towards payment of upfront margin is known as pledging.

Until now brokers used to get a Power of Attorney from their clients, which authorized them to move client securities from their Demat account to broker pool account from where it was transferred to clearing corporation, however, the new regulations have put an end to the Power of Attorney practice for pledging of securities.

From now onwards, when clients wish to use securities as margin, the securities will not leave the Demat account of the investor, however, a lien shall be marked for the purpose of trade and the depository will proceed to pledge client shares in a margin basis OTP verification on client’s registered mobile no.

Hence, the investor will retain the ownership and will continue to get all the corporate benefits associated with the securities.This is a prodigious step which will ensure that investor’s securities are not misused.

We at Arihant are very excited to have introduced a new system which will enable our customers to pledge securities through Whatsapp.

Watch Full Video to Know How to Pledge your Shares through Whatsapp

Watch Full Video to Know How to Pledge your Share

However, under the new system securities will be considered as margin only when an investor pledges them in advance before executing a trade. Note that only securities approved by SEBI can be used for this purpose.
A detailed FAQ on Pledge and Repledge process is available at . this link.

Conclusion:

Its almost after two decades that such a paradigm shift is introduced by SEBI. These changes will be monumental in strengthening the regulatory framework and will bring in more transparency in trades. It inevitably will put an end to speculations and will safeguard the interests of shareholders by curbing any chances of misuse of securities by stock brokers, as witnessed in the past.

Any change even if it’s for betterment will not come without discomforts but it is also true that progress is not possible without change. There might be some initial hiccups in implementing the new regulations but in the long run, they are sure to benefit the investors.

We at Arihant Capital are totally geared up to make this transition seamless for our valued customers and will be happy to assist you further in this regard.

 

 

Arihant Team
The Arihant Team believes everyone deserves access to sophisticated financial advice. From day one, our mission has been to help make investing easier and accessible to every Indian. Our team of experts are curating informative and research-based article on this blog, to help make investing and managing your money easier for you!

If you would like us to discuss a specific topic on our blog, please write to us at research@arihantcapital.com.
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