SEBI's new margin standards are painful for investors and participants

(Commercial Representative) Mumbai, Ta. 19 August 2020, Wednesday

In the cash segment introduced in November 2016 by the Securities and Exchange Board of India (SEBI), the regulator of the capital market, payments must be made to the stockbroker within two days of the purchase of securities-shares in the framework of margin consolidation. Till November 2017, margin aggregation from customers was mandatory only in Futures and Options (F&O).

From September 1, 2020, stockbrokers will have to report to their clients for both buy and sell deals and the available upfront margins, failing which penalties will be levied. The equivalent margin was available till now for the stocks which have fallen in the demat account of the investors, in place of which these stocks will now be mortgaged to the broker.

The standards make it clear that the new standards require all investors to pay an upfront margin to sell or buy their shares. So that the customer can sell the shares subject to upfront margin payment before the transaction. Accordingly, the shares which have so far fallen into the customer's demat account will not be considered sufficient for the achievement of margin. These stocks have to be delivered on the same day, otherwise there will be a penalty.

Currently, there is a T-plus to settlement i.e. trading day and two-day settlement cycle through exchanges. In which the investor can deliver securities-shares up to T Plus Two. Currently there is a problem with delivery on the day of the deal.

Investors usually sell shares of a particular company and buy shares of another company from the proceeds. The margins of the sale of A shares cover the delivery of shares of another company on the same day, but now the investor has to deposit a new margin to buy B shares. This will have to be done by mortgaging or making payment to other stock brokers.

In addition, stockbrokers have so far obtained shares from customers' demat accounts on the basis of power of attorney (POA) as collateral. This system is known as Title Transfer (TT).

They have stockbroker trades for their client in the derivatives or cash segment on the basis of collaterals. Due to misuse by some brokers, SEBI has decided not to allow the TT and POA system to continue.