Sebi Regulations Regarding Margin Trading

Sebi Regulations Regarding Margin Trading

You must have heard a lot of talk about the new SEBI margin rules recently introduced by the Indian Stock Exchange Board. SEBI has introduced these SEBI new margin rules to standardise leverage and ensure transparency in the stock market. In addition, the investors' interests will be protected, and broker misuse of client securities will be prevented through this new pledge mechanism.

Let’s have a detailed understanding of what margin trading is and changes in its pledge according to the SEBI new margin rules. To understand the changes in SEBI's new rules on margin trading, read the article below.

What Is Margin Trading?

The term margin refers to leverage in financial markets. It gives traders the ability to purchase stocks they cannot afford. You can acquire stocks by merely paying a proportion of their value using margin trading. As security, the broker may pay the margin in cash or shares, or the broker may fund the balance. The securities are maintained in the investor's trading account as security while the broker lends money to them. As soon as the position has been cleared, the margin is settled.

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Table of Content

  1. What Is Margin Trading?
  2. What Are The Changes In Pledging Norms?
  3. Steps To Pledge Under SEBI New Margin Rule
  4. How SEBI New Margin Rules Will Impact Investors?
  5. Risk And Limitations Of Margin Pledge In New Margin Rules By SEBI
  6. Conclusion

What Are The Changes In Pledging Norms?

This will lead to several significant changes in the current system. For everyone involved in stock trading, investors and stockbrokers, the SEBI new margin rules guarantee standards will be significant and make margin laws even more stringent. 

The key points are given below: 

  1. The Securities and Exchange Board of India has made it mandatory for financial intermediaries to start collecting margin from investors immediately. 
  2. The practice of power of attorney, which allows clients to entrust the broker with transactions on their behalf, will also be eliminated. 
  3. For margin pledges, the same power of attorney is no longer valid. The margin pledge must now be created separately by investors who wish to take advantage of the margin.
  4. Before introducing the new system, it was not compulsory to collect an upfront margin, but in the new system, investors will have to pay a margin of at least 30 % in advance to obtain a margin loan. 
  5. There will also have to be an advance margin in the cash segment.

The SEBI margin rules have been changed in the way explained above. The new regulations will replace the current procedure for obtaining a Margin Trade Funding Facility. Investors' acquired shares will remain in the recently established Client Unpaid Securities Account (CUSA) for T+6 days. You must apply between T+1 days and 4:00 p.m. for margin usage. If you don't, a broker may sell stocks on your behalf to settle your debts on a CUSA account. 

Steps To Pledge Under SEBI New Margin Rule

The procedures for pledging the SEBI margin rules are given below: 

  • Step 1: Contact your stockbroker to ask them to lend you a certain number of securities. 
  • Step 2: The Clearing Company will send a link to your registered mobile email address when the pledge request is submitted. 
  • Step 3: On your registered mail ID or mobile number, click on the link you received.
  • Step 4: The authentication process begins when you click the link. This link will take you to the web pages of NSDL and CDSL, where the PAN or demat account number has to be verified. 
  • Step 5: Click Generate OTP to authorise a pledge after verifying your details. 
  • Step 6: An OTP will be sent to your registered mail address and mobile number.
  • Step 7: To verify your request on the NSDL and CDSL platforms, you must enter an OTP. A confirmation message for your pledge margin request will be sent to you, and it will take a few hours for your pledge request to be activated.

To pledge under the SEBI margin rules, always follow the above steps.

How SEBI New Margin Rules Will Impact Investors?

We may see a drop in trading volumes in the cash segment due to new margin rules. It is because SEBI has almost shut down excessive leverage transactions and ordered brokers to raise higher fees for investors. Furthermore, investors must wait for T+2 days after purchasing their shares before committing. In addition, this could have little effect on investors who perform short-term trading. Nevertheless, active traders will feel a rise in their trading costs as they need to increase their margins sooner rather than later. The SEBI new margin rules carry both a positive and negative impact on the investors.

Risk And Limitations Of Margin Pledge In New Margin Rules By SEBI

The risks and limitations of margin pledge are as follows;

  1. High-volume traders who do not have a blocked amount for margin commitments cannot quickly execute transactions. 
  2. Big traders are one of the driving forces behind providing liquidity in the market, as they always trade a wide range of shares. 
  3. If traders reduced high trade volumes, volatility could rise in the stock market. 
  4. The stockbroker may sell the stocks to recover the debt if the margin trader cannot repay the margin.

These different kinds of limitations are always a part of SEBI margin rules.

Conclusion

There is no room for manipulation in the new margin pledge system. Brokerage firms act as intermediaries between you and the exchanges, managing your funds and securities. Stockbrokers may no longer abuse the ownership title of securities and margin funds under SEBI margin rules, strict monitoring system and required reforms such as margin guarantees. Moreover, you can benefit from the pledged stock through bonuses, dividends, rights, etc. Therefore, investors' interests are being helped by the new pledge system. To start margin trading, start with the BlinkX trading app, which offers an easy way to manage your online trade.

Sebi Margin Rules FAQs

As stated in the SEBI Regulations, only authorised broker-dealers may offer margin trading accounts. The relevant stock exchanges and SEBI have already established securities that can be margin traded. Investors can open trades against the margin using shares in the form of cash or collateral.

The Federal Reserve, the Financial Industry Regulatory Authority (FINRA), and the Securities and Exchange Commission strictly regulate margin trading.

It is possible to liquidate your collateral to cover the exchange's costs if you are subject to the exchange's minimum margin requirements. The liquidation of margin trading is a taxable event subject to capital gains tax.


 

There is no plan to withdraw margin rules in respect of SEBI completely. SEBI will never give up the whole set of rules it has put in place. It can damage its image.

When buying shares under the margin trading scheme, you will be required to pledge all the shares that you intend to sell to maintain your position. It has to be done before 9 p.m. on the same day. If your pledge is not authorised, the shares will be split between T + 7 days.