SEBI's New Norm to Collect Margin for Cash Segment is A Step in Right Direction, Says Nithin Kamath of Zerodha
Market regulator SEBI has directed stock brokers to collect an initial margin of between 15-25%, even for simple buying and selling of shares, in the cash segment. As per a news report from The Hindu Businessline, market experts are up in arms saying that 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. 
 
However, Nithin Kamath, CEO and Founder of Zerodha, which India’s largest stock broker, in a blog post says these new norms are positive for the industry and will not affect the average retail investor. The post has helped set the record straight after so many convoluted versions of media reports started doing the rounds on different social media sites.
 
Experts to who spoke to Hindu Businessline contend that 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 claimed that maintaining a margin deposit with brokers for merely selling shares, is unheard of even globally. The other option is that 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 in order to safeguard against potential frauds, 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. The new rule could effectively mean that they need to sacrifice this safety net, they said to the paper. 
 
SEBI is forcing investors to keep their demat and brokerage with the same entity. This is being touted as a brutal anti-investor move, as investors should have the right to choose their options. 
 
Institutional investors who treat equity trades as business transactions, like foreign portfolio investors and mutual funds have been exempted from this rule.
 
Another person in the news report says, “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”.
 
Mr Kamath of Zerodha however gave credit to SEBI for working hard to fix a legacy issue of the broking industry - a misused loophole (essentially a way to use one client’s balance (cash or margin from pledging securities) for another client trades, or by the brokerage firm itself).
 
He hailed the new SEBI circular and said that it will only clean up the system. He claimed that it will most likely make no difference to the life of any retail equity investor or trader.
 
He pointed out that there is already a rule in place for collecting and reporting margins in the derivative segments (Equity, Currency, & Commodity). All brokerage firms receive a file from the exchange at the end of the day detailing the margins required for positions taken by their clients (SPAN + Exposure). 
 
The brokerages are then required to upload back details of margins available in the client’s account. If the available margin is lesser than the exchange stipulated margin, a penalty  is levied on the shortfall. This reporting ensures that a client can take positions only to the extent of margin in the account. 
 
The SEBI circular issued earlier this year now bans brokerage from pledging client securities to any third party, even if the client has not paid the entire money to purchase the security. 
 
Mr Kamath says the new rule means that even clients are not allowed to do an off-market transfer for a loan anymore, it can  only be done by marking a pledge to an non-banking finance company (NBFC) directly from client demat, and funds from pledge get credited directly to the client’s bank account. This has ensured that client securities cannot be misused by the brokerage firm. 
 
The equity (cash) segment was in dire need of a fix, he wrote. The traditional way of brokers allowing clients to buy stocks for delivery without asking for upfront margins still continues. A client is asked to remit the buy transaction through a cheque or online transfer after the execution of the buy transaction. If the client takes more than two days to remit, the broker earns additional income by charging interest on the debit balance. 
 
This is an extra revenue stream for the broker but it increases the risk for the brokerage firm, as well as the capital market ecosystem as the stock price can go down and if no money / margin is collected from the client, chances of client default exist, Mr Kamath points out.
 
Even if the client does not fund the buy transaction, the brokerage firm would still be required to pay the settlement obligation due to the stock exchange on T+2. It is possible that the broker could use unutilized credit balances belonging to other clients to fund such purchases of a different client. 
 
With this new circular of collecting and reporting margins for stocks, the equity (cash) segment becomes exactly like the derivative (F&O) segment. Instead of SPAN + Exposure, VaR+ELM margin is required to either buy or sell stocks, Kamath points out. This reduces the overall risk and the reporting mechanism ensures that one client’s funds cannot be used by another client or the brokerage firm from January 2020 onwards.
 
Seeking to dispel all the market experts’ objections, Mr Kamath reiterated that nothing would change at Zerodha, or at most online brokerage firms since clients have always been asked for accounts to be funded before placing a purchase order. 
 
However he added that things would definitely change for people trading with traditional brokers where the practice was to pay money or deliver stocks only after taking a trade. Now they will have to maintain some margin with the broker (for purchase transactions) or transfer stocks to the broker in advance through DIS slips (for sale transactions).
 
For buy delivery trades, brokerage firms will have to now collect minimum VaR+ELM.
 
At brokerage firms which already insist on the entire delivery purchase value to be funded in advance, there would be no other requirement to bring in VaR+ELM. There could be one-off cases where one might have bought a stock for intraday and might be forced to take delivery for any reason, in such cases, if one is short on the margins, a penalty will get levied for the shortfall amount.
 
For sell delivery trades, the brokerage firm continues to run the risk of the client not delivering the stock after selling. This cannot really happen in cases where the brokerage firm has the POA on demat to debit shares when the client sells a stock, as the firm can ensure the client can’t transfer stocks out. But wherever the brokerage firm does not have the POA, they will have to collect margins before allowing clients to sell stocks to ensure that in case the client does not deliver, there is margin available to make good of any potential auction settlement loss to the buyer.
 
 
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    COMMENTS

    Sandeep More

    5 months ago

    Margin money for selling shares through DIS where trading and Demat accounts are maintained with the same broker is uncalled for. We normally sell the shares during emergencies and now, we are ordered to arrange margin funds in order to enable us to sell our own shares. Not good at all.

    B Ravi

    5 months ago

    SEBI your promises abut returnog money of all ivester must start now as you have sold lots of properties of PANCARDLUB LTD. We have several times requested. Presented all documents.DO not test oir pessions. You need to speak out andtell us current status otherwise you will have to face the effect of you admancy soon. This is the high time you are deadly sitting on this issues.Hipe itsnot reaches at peronal level.

    madhusudan modani

    5 months ago

    It is a brutal form of regulation to deposit margin for selling shares which is not there in the world. What about the margin if collected and the trade is not executed for months at the desired rate of the investor. SEBI is there to close/stop all small brokers and small investors to trade. Instead of regulating the small brokers/investors they should concentrate on companies and big brokers whose default brings more losses to the investors.

    B Ravi

    5 months ago

    SEBI What about our money invested in Pancard club. You have sold their lots of properties but not returned our investors money. What is stopping you. You are regulating in favour of people or janta like us or favouring sombody else. Its our hard earned money. The company was / is ding well and giving our money back with better returns than government. When it started you did not stopped the company. You did this on company after 30 years time. What is a status today when are you returning our money. Now we are 70+ in age. what for you are there. Talk about returning the money.

    SEBI notice to PC Jeweller MD over 'insider trading'
    Market regulator SEBI on Tuesday served notice to PC Jeweller MD Balram Garg asking him why he should not be barred from the securities market over charges of insider trading.
     
    SEBI also ordered impounding of alleged illegal gains of over Rs 8 crore made by two promoters and related entities of the jewellery firm.
     
    "In light of the alleged violations by Balram Garg, this order shall be treated as a notice calling upon him to show cause as to why direction shall not be passed against him to restrain him from accessing the securities market and prohibiting him from buying, selling or otherwise dealing in securities for an appropriate period," the SEBI order said.
     
    The order said that a sum of Rs 6.17 crore shall be impounded "jointly and severally", from Shivani Gupta, Sachin Gupta and Amit Garg, being the notional loss avoided on account of trades carried out in the trading accounts of Shivani Gupta, a promoter of the company along with her husband Sachin Gupta. 
     
    Sachin Gupta is the son of former Chairman Padam Chand Gupta, who passed away in January this year, while Amit Garg is the nephew of Padam Chand Gupta and Balram Garg.
     
    The SEBI also said that a sum of Rs 2.13 crore shall be impounded jointly and severally, from Quick Developers Pvt Ltd and Amit Garg, being the notional loss avoided and gains made on account of trades carried out in the trading account of Quick Developers Pvt Ltd.
     
    Besides, the order said that banks shall not allow debits from the bank accounts of Shivani and Sachin Gupta and Amit Garg, and Quick Developers Pvt Ltd, to the extent of the amounts impounded until they open escrow accounts, as stated in the order, and the concerned amounts are transferred. 
     
    Further, SEBI directed them to provide, within seven days, a full inventory of all their assets and properties and details of all their bank accounts, demat accounts and holdings of shares, if held in physical form, and details of companies in which they hold substantial or controlling interest.
     
    During the investigation, the promoters of the company were Balram Garg and Padam Chand Gupta. As Gupta passed away on January 28, SEBI will not be able to initiate proceedings against him for the alleged violations of Insider Trading Regulations, 2015.
     
    SEBI had conducted an investigation in PC Jeweller stocks to ascertain whether or not suspected entities had traded in it during the period April 2-July 31, 2018 on the basis of unpublished price sensitive information, in violation of SEBI's Insider Trading Regulations.
     
    PC Jeweller was incorporated on April 13, 2005, as a private limited company under the name of 'P. Chand Jeweller Pvt Ltd' and was later changed to 'PC Jeweller Pvt Ltd' on December 9, 2009. The Delhi-based company was converted into a public company on August 2, 2011. 
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    Rajya Sabha paves way for unified regulator for financial services
    Paving the way for setting up an authority to develop and regulate the financial services market in the international financial services centres (IFSCs), the Rajya Sabha on Thursday passed the International Financial Services Centres Authority Bill.
     
    The proposed authority will comprise nine members, including a Chairperson. The first IFSC was set up at Gujarat International Finance Tec-City (GIFT) in Gandhinagar.
     
    Replying to the debate on the Bill, Finance Minister Nirmala Sitharaman said the announcement for setting up a unified regulator was made in 2018 and the Bill had been brought now.
     
    To the remark of Jairam Ramesh (Congress) calling the progress at the GIFT City as abysmal against the projections, the Minister said two stock exchanges were operating from the IFSC and the daily volume had crossed $4 billion.
     
    She said, 13 international class banks were operating there and had $24 billion transactions.
     
    "Forty 40 operational brokers and over 100 licenced brokers are engaged in institutional broking services and proprietary trading. There are 19 plus players in the insurance sector. Reinsurance businesses are being conducted. Insurance intermediaries are operating from there and the sum insured is in the range of $30 billion," the Minister said.
     
    Earlier, participating in the debate, Ramesh said after 9 years of existence less than 3 million sqft commercial property out of 62 million sqft had been developed at the GIFT City. "It's an abysmal rate of progress. Obviously, the ambition with which GIFT City was created is yet to be fulfilled," he said.
     
    In her reply, Sitharaman said though the IFSC was permitted, cleared and notified by the Commerce Ministry in 2011, it was only in 2015 that the regulatory bodies issued their guidelines.
     
    Amar Patnaik (BJD) raised the issue of composition of performance review committee with two of its members being from the IFSC Authority itself, thus the possibility of conflict of interest.
     
    Sitharaman, however, said it might appear as an in-house oversight committee but it would report to the board. "It follows the best practices in the world," the Minister said.
     
    The International Financial Services Centres Authority Bill, 2019 would now head for the President's assent.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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