SEBI New Margin Rules Explained: Here Is What Will Change For You

SEBI has implemented the new margin rules regarding securities pledging- repledging. It is causing quite a stir already with several experts and market players arguing that the new regulations will significantly stifle day trading, which constitutes almost 90 percent of the trading volume in the exchange.

SEBI was approached on several occasions by the market players to reevaluate the changes proposed in the new regime. This time too, the ANMI members asked SEBI to grant more times to implement the new rules. But the market watchdog refused to extend any further time.

“Sebi declined to grant further time to implement the margin pledge/repledge process,” said an official. So, from September, if you are planning day trading, you would need to work around the SEBI’s new margin rules.

In a previous write-up, we have discussed the new margin pledge rules introduced by SEBI. If you are having difficulty working around the new regulations, here is a step-by-step guide to help you.

Changes In The Pledging Norms

The new SEBI margin rules will affect you if you use broker margin and have signed a power of attorney (POA) to your broker.

The new rule obliterates POA practice. It mandates that when you pledge securities to the broker, it will remain in your Demat account. You must then pledge these securities directly to the clearing corporation to receive a margin loan. Previously, when you used to pledge, your stocks were transferred to the broker’s Demat account. But from now on, you would need to authorise a pledge to your broker; it will then repledge with the clearing corporation to offer you margin facilities.

In the earlier system, the cash margin was handled by the broker. Investors either had to transfer their shares to the broker’s account or sign a power of attorney. There were a couple of incidences that came into the light where some small brokers were indulged in misusing the POA signed to them.

But now securities will continue to remain in the client’s account, and receive all corporate benefits on the shares. Besides, client level authorisation will add layers of transparency to the existing system and curb scopes of margin mishandling.

• The new regulations mandate brokers to collect margin upfront from investors during the purchase and selling of shares
• No blanket power of attorney can be signed to the broker. Earlier, investors used to sign POA to the broker to carry out transactions on their behalf. The POA can’t be used any longer for pledging.
• Investors now have to sign a separate margin pledge to avail margin facilities.
• From now on, brokers will have to collect a 30 percent margin upfront from investors to forward margin facilities.
• Currently, investors can use profit generated from intraday trading to take a position in another trade. But the new rule prohibits such practices.  It mandates that next day trading is no longer available on shares.
• Till now, investors only had to complete their margin commitments at the end of the day, but the new rule requires them to fulfil the margin norms at the beginning of the deal.

Steps To Follow To Pledge Under The New Margin Rule

• From now on, you would need to generate a separate margin pledge using the broker’s system
• You will receive an SMS/email from the depository (CDSL or NSDL) asking for authentication
• You will need to authenticate your request at the depository page. Verify all details and approve the request using PAN or an OTP
• Once you verify, your broker will receive the pledging request, which they will need to repledge with the clearing corporation

You will receive more details from your broker on how to work around the new margin rules. Meanwhile, market experts suspect that the new margin rules by SEBI will severely impact the daily trading volume. 30-35 percent of daily trading turnover depends on the additional margin forwarded by the brokers, but going ahead, this facility no longer will be available, which means, investors will have to invest more of their capital to conduct trading. This could lead to volume drop and further polarisation of stocks as from now on stocks pledged with the brokers need to undergo scrutiny as mandated by the new rules.