The markets regulator Securities and Exchange Board of India (SEBI) decision to change the margin requirement norm for share investment, will force retail investors to maintain deposit money with their stockbrokers to buy or sell shares.
The move will bring domestic retail investors on par with institutional as well as overseas counterparts.
Apparently, the changes effective from January 2020, is aimed at bringing harmony between all products available on the bourses.
Currently, in the derivatives segment, the brokers are mandated to collect an upfront cash margin even for simple buying and selling of shares.
Institutional investors who treat equity trades as business transactions, including foreign portfolio investors and mutual funds, have been exempted from this rule.
So far, clients did not have to pay brokers an initial amount to deal in the cash market segment as the entire amount was collected on a T+2 (today+2) basis during settlement.
But that convenience of payment has now ended with SEBI’s recent dictate.
Henceforth, like in the derivatives segment, the TMs/CMs (trading members, clearing members) in the cash segment will also be required to mandatorily collect upfront VaR (value at risk) and ELM (extreme loss margin) from their clients.
Clients should ensure that the VaR margins and ELM are paid in advance of trades and other margins are paid as soon as margin calls are made by the stock exchanges/TMs/CMs, SEBI said in a recent dictate to brokers.
This effectively means that those who deal regularly in the stock markets will have to maintain some deposit money with their brokers, failing which the latter could refuse to ‘even sell’ shares that are already held.
Both VAR and ELM could come to around 15-25% of the entire value of trade.
Any shortfall in client payments will have to be reported to the exchange in five days from trade.
The measure allows to collect margin from clients taking into account the practical difficulties often faced by them, only for the purpose of levy of penalty, and it should not be construed that clients have been allowed two days to pay the margin due from them, the SEBI statement added.
Clients making early pay-in of securities, or, deliver the securities on the same day, have been exempted from this rule.
SEBI has said that any shortfall in the collection of full payment would attract a penalty.
Currently, clearing corporations collect VaR and ELM from brokers for the cash segment by adjusting it against the brokers’ available liquid assets. Collecting the same was left to the brokers.
Now, SEBI has said that brokers should collect it from their clients.
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