The securities and exchange board of India (SEBI), is the regulatory body for the money market and derivatives market (also called a commodity market) for the Indian stock exchange. The organization is accountable for maintaining the Indian stock exchange, safe for retail investors. SEBI’s new marginal rules notified on the first of September 2020, will help in bringing transparency and preventing brokerages from misusing client’s securities.
SEBI’s new marginal rules will bring more security to the treading and the investments of retail investors. This may help reduce risk within the share market and protect the rights of the investors. After Karvi’s stockbroking, the equity broker misused the client’s securities. SEBI came up with this new marginal rule to guard people’s hard-earned money.
let us understand what’s margin? Margin is That money or the liquidity present within the invertors trading account or within the Demat account during all the trading practices. Sometimes It’s also present in the way of pledged shares.
But who provides leverage to the retail investors? This is done by Broking companies. They make sure their clients are able to buy shares with the lesser amounts available in their trading accounts and this is called leverages or margin trading.
how the method of margin trading works?
Within the stock market, margin trading refers to the method whereby individual investors buy more stocks than they’ll afford. This means one can be allowed to buy shares by paying a marginal amount of the as a particular value for all the shares.
Margin trading is be considered leveraging positions within the market either with cash or securities by investors. the broker will fund margin trading transactions.
How the delivery of shares occurs?
At the present, if someone buys or sells shares on Monday it’ll be debit or credit on Wednesday (T+2)days into their respective trading account within which the broker company gives the permission to buy that shares by giving them leverages.
But as per SEBI’s new marginal rules, if you’re buying shares of 1, 00, 000 rupees in your account 20,000 rupees must be present as a margin. The new rules mandate the buyer or the seller of the securities to have a 20% upfront margin in their respective account before entering into the transaction.
Till now, clients were needed to meet margin requirements once in their account 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.
It is mandatory for brokers to collect margins from investors upfront for any purchase or sale of shares. Failing to do so will attract a penalty. In the meanwhile after selling the shares if someone transfers the shares to someone else then it will be in trouble while settlement system .in 95% of cases it won’t happen but to protect the rest 5% of cases SEBI came up with this strict rule.
Is there any alternative to SEBI’s new marginal rules ?
If a client sells or buys shares without having margin or cash in its trading account. broker’s clients can pledge shares worth an equivalent amount. Say a client wanted to do a trade worth Rs 1 cr. The Rs 20 lakh margin he has to put with the broker can be in the form of shares as well.
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. Before the new regulations came into force, the client would give his broker power of attorney (POA) over his or her Demat account.
Using the POA ,the broker would transfer the shares from the client demat account to his own and then further pledge the shares with the clearing corporation to meet the margin requirements.
Why did SEBI change the rules?
Many brokerages were found to be misusing the POA. Sometimes one client’s shares would be used to meet the margin requirement of some other client. In some cases, the broker would borrow money using the client’s shares as collateral, without informing the client.
As per the new rule, the stock will continue to remain in the investor’s Demat account and can be directly pledged to the clearing corporation. As the securities remain in the investor’s own Demat account, they will enjoy all corporate on their shares.
Why are brokers and traders protesting?
Large traders do multiple trades in a single day. The process for pledging shares has suddenly got longer. This restricts the trader’s ability to do multiple traders and hurts the broker’s earning’s as well.
The changes in the margin system and securities pledge – repledging could undoubtedly bring disruptions in the volumes of daily trading as there is insufficient preparation and validation by the participants in this ecosystem like Exchanges, Depositories, Depository Participants, Clearing corp, Brokers and Clients.
Last but not the list whenever SEBI came up with this kind of rule investors get acquainted with each passing time and get used to it because SEBI protecting investor’s rights and securities.
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