SEBI’s New Guidelines


On August 31, the capital market regulator SEBI (Securities and Exchange Board of India) has decided to implement its new margin pledge rules from September 1, 2020. The decision was taken after a meeting with clearing corporations, brokers, and depositories. 

According to SEBI, these standards will safeguard the interest of all investors. Besides, the market regulator wants to have a higher grade of transparency in the stock market. 

The Co-Founder & CEO at FYERS, Tejas Koday, said that the new pledge mechanism is likely to bring much-needed transparency. Furthermore, this will prevent brokerages from misusing the securities of clients. 

Since brokers still needed time to digest these new alterations in the guidelines, they requested for the extension of the implementation of the new rule. Also, due to several challenges faced by the market participants, ANMI had requested SEBI to stretch the date of implementation of the new mechanism on margin pledge by one month till September 30. 

But SEBI refused to grant the extension of further time which came as a big surprise to ANMI (Association of National Exchanges Members of India) and its 900 members.

What is Margin? 

Margin is defined as the upfront trading amount that is collected by the brokers as security to increase support. Shares can be deposited as margin for claiming the derivative trading limits. 

Until now, brokers have been using PoA (Power of Attorney) for transferring clients shares into a separate ‘margin account’ to allocate trading limits. Besides, there wasn’t any need for further client permission for transferring shares for margin, since the broken held the PoA. 

However, as per the new norms, SEBI has now ceased the process of PoA for margin, and it has made the pledging of client shares with the broker obligatory. This revocation and creation of pledge allure charges from the DPs (Depository Players) such as NSDL (National Services Depository Ltd) and CDSL (Central Depository Services Ltd) and this must be borne by clients.

The two depository players handle all the Demat Accounts. Now, on a daily basis, it’s crucial to create and revoke hundreds and thousands of crores worth pledges. 

SEBI’s New Margin Trading Rule

In February, SEBI had come out with the norms regarding the margin trading or collection which were scheduled to be implemented from June. Margin trading accounted for nearly 90 per cent of the daily turnover of the stock market. 

Unfortunately, the guidelines were not welcomed by the brokerage firms with open arms. The reason for the denial was that the rules would put a pause to intraday trading and turnover generated out of it. 

The Securities and Exchange Board of India asked brokers to collect VaR (value at risk) and ELM (extreme loss margin) upfront from their clients. The rules are likely to come into effect in a phased manner starting in December 2020. 

Phase 1: Starting from December 2020, the brokers will have to pay penalties in case the margin exceeds 25 per cent of the sum of VaR and ELM.

Phase 2: From March 2021 and June 20221, if the margins go beyond 50% and 70% of the sum of VaR and ELM, the brokers will be penalized.

Phase 3: From August 2021, if the margin exceeds VaR and ELM, then brokers will be penalized. 

Brokers Got  the Upsetting News

As the brokers have lost PoA (Power of Attorney), clients need to pay ₹50 a scrip for ₹1 lakh shares pledged. Besides, the transaction per scrip will attract a 0.5% cost of the value of shares. 

Although the charge may appear minute, when looked in terms of the daily derivative churn, one can discover that hundreds and thousands of crores worth of pledging will take place every day to claim margin limits.

With the SEBI’s new rule on margin collection in the stock market, the margin collection will come with an added cost burden. Until now, there haven’t been any charges when brokers used the shares of the client as margins and let them leverage in trading. 

However, the same contract will now attract charges, which will be in addition to the brokerage fees. 

Depositories Got the Good News 

As per brokers, the two depositories will collect huge revenues due to this new margin rule. However, it will be an additional cost for traders. Derivatives, on an average, trade worth more than ₹10-lakh crores on a daily basis. On the other hand, brokers ask for margin ranging anywhere between 12 and 30 per cent. 

Then, there’s a market-to-market that entails an additional top-up margin. The share price of CDSL has increased to nearly 25% in the last month on the back of anticipated higher revenues due to SEBI’s new guideline which will come into effect from today. CSDL is the only listed depository. 

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