Pros & cons of SEBI's new margin rule (2024)

At the start of May month, SEBI's new margin rule has come into effect, but a penalty on shortfall shall be levied w.e.f. 1st August 2022.

There has been a lot of talk about this new rule in the context of trading. Let us understand what the new rule is all about and how it will have an impact on investors/traders and brokers.

The regulator had come out with a framework for segregation and monitoring of collateral at the client level amidst instances of misuse of clients' collaterals by some of the trading members.

Such misuse was exposed especially in the aftermath of the Karvy Stock Broking scam where the shares of clients were pledged illegally as collateral against loans.

Therefore, segregating of client's collateral will safeguard the collateral from being misused by trading or clearing members.

Firstly, the new rule pertains to the margin that is provided by the broker on the pledged shares.

Generally, a broker submits margin information to the SEBI, which means that the broker needs to specify how much margin has been provided to the clients based on the pledged securities received by the broker.

Earlier, SEBI used to monitor this information at broker level which is now monitored at client level after the new rule.

Earlier, clients were able to trade with the entire margin received on pledging their securities. However, with the new margin rule, w.e.f. May 2, 2022, clients can now use only 50% of their margin against securities, while the balance 50% margin must be available in cash(bank) with broker to initiate trade.

There has been a debate regarding this rule as this move is expected to increase the capital requirement for brokers as well as clients.

Let’s understand this with a hypothetical case: An investor has shares worth Rs.5,00,000 in his portfolio. He decides to pledge the shares to obtain a collateral margin against the shares.

After haircut, he gets about Rs.4,00,000 as collateral margin. Earlier, a trader could use this entire margin to trade. But now, the trader needs to bring in additional Rs.2,00,000 (50%) as cash in his trading account if he needs to initiate trade worth of Rs.4,00,000 margin.

The new rule has been implemented with a view to protecting client’s interests from excessive trading and reducing brokers' risk. But, it also increases the capital requirements for brokers and may increase the cost for traders/investors.

(The author is President at Choice Broking)

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