SEBI's new Margin rules explained in 7 points

Change in margin system and securities pledge-repledging could bring disruptions in volumes of daily trading as there is insufficient preparation. 

The new margin rules have come into effect after SEBI's refusal to extend the deadline to implement the new rules on margin pledge any further. SEBI's new margin rules aim at bringing transparency and preventing brokerages from misusing clients' securities. These norms came out earlier this year in February and were initially scheduled to come into effect from June 1. The date was then extended to August 1 and thereafter to September 1. While the brokers and other participants requested more time to make their systems ready, SEBI refused to extend by saying there was enough time to do the changes. 

Here are the changes: 

 1. The stock will continue to remain in investor's demat account and can be directly pledged to the clearing corporation. As the securities remain in investors’ own demat account, they will enjoy all corporate benefits on their shares. 

 2. Under the old system, cash margins were taken care of by the broker. investors either had to transfer their shares to the brokers’ account or give power of attorney (POA) to the broker. Some brokers went on to misuse the POA assigned to them. 

 3. It is mandatory for brokers to collect margins from investors upfront for any purchase of sale of shares. Failing to do so will attract a penalty. 

 4. No Power of Attorney (POA) to be assigned to brokers. The investors used to give authority to the brokers by way of POA to execute transaction on their behalf. The POA cannot be used for pledging anymore. 

 5. Investors who want to avail margin now have to create margin pledge separately. "Earlier collecting upfront margin wasn’t mandatory, but under the new system, investors will have to pay at least 20-40% margin upfront to avail a margin loan". 

 6. Shares bought today cannot be sold tomorrow. Currently, n investor can use intraday realised profits for taking new positions on the same trading day. According to the new norms, you will be able to use it only after T+2 days in case of equity/stocks once you receive the delivery of shares in your account. 

7. "Till now, clients needed to meet margin requirements in their account once at the end of the day. But, the new margin rules of SEBI will require them to fulfill their margin obligations at the beginning of the deal". 

Some of benefits of the new pledge system are as under: 

 A. No misuse of securities: Since stocks don’t leave the investor’s account, there’s less chance of misuse of securities. Also, it wouldn’t be possible to pledge one client’s stocks to offer margin to a different client. 

B Corporate actions: In the existing pledge system, since the stocks are held in the broker’s collateral account, the broker is the recipient of all cash and non-cash corporate actions like dividends, bonus, rights, etc. While the broker is required to voluntarily transfer these benefits to the investor, a non-savvy investor may miss out on claiming such credits in the event that the broker doesn’t. 

C. Pledge allowed for all approved securities: Some brokers don’t accept pledge of all instruments allowed by the Exchanges. For example, certain liquid funds pay dividends in the form of more units of the same fund. The operational nightmare around reconciling the dividends received and transferring them to the investors has held us back from accepting these instruments as margins. Going forward, since the stocks are all held in the client’s own account, any approved security will be accepted for pledge. 

D. Facility to sell pledged stocks: This is a feature brokers are working on making available, allowing you to sell pledged stocks without having to request for unpledge and wait until they are received to your demat account. With the new pledge system it becomes much easier to deploy this. This covers the risk from market movements in the stocks you’ve pledged.

Going forward, The brokers have been instructed to collect VaR (value at risk) and ELM (extreme loss margin) upfront from their clients. These rules will be implemented in a phased manner starting in December 2020.
Phase 1: From December 2020, the brokers will be penalized if the margin is more than 25% of the sum of VaR and ELM.
Phase 2: From March 2021 and June 21, brokers will be penalized if the margin exceeds 50% and 70% of the sum of VaR and ELM.
Phase 3: From August 2021, brokers will be penalized if the margin exceeds VaR and ELM.