There has been a flurry of discussions after SEBI has passed the new circular that makes it mandatory for investors to deposit 15-25% margin money with the brokers both to buy or sell shares. This act would create a major entry and exit barrier, which is not seen in a positive light by most. So our CEO - Mr. Prakarsh Gagdani thought of clearing the air by helping you understand how this move might, in fact, help make the market a better place. 

As a practice, all major organised brokers collect and report margins in the derivative systems to exchanges. They upload details about margins in the client's account every day and send the file to exchanges. The exchanges, in turn, penalise the brokers if the margin is lesser than the exchange stipulated margin, thus ensuring that a client can take positions only to the extent of margin available in the account.

With the traditional way of broking, the equity segment was quite vulnerable and the chances of client default were higher. This is because the client had the leverage to remit the buy transaction through a cheque or online transfer after the execution of the buy transaction and in case, the client fails to remit within two days, the broker would earn interest on the debit balance, which actually increases the risk to the capital market ecosystem as stock prices might decrease.   

Our CEO, Mr Gagdani believes that the current move would help reduce broker default while fixing the legacy issue in the broking industry. Firstly, those brokers which do not follow a proper compliance process or have been functioning by giving excessive leverage to their clients might find it difficult to sustain this change owing to the increased stringency and cost involved in it. Secondly, in the past, it was observed that the brokers could misuse one client’s balance either for another client trades or for its own benefit. The act will definitely curb this legacy issue that had been prevailing in the industry for quite some time now.  

“I don’t see this move making much difference to the retail equity investor or trader, rather it might support system cleanup. This is because the new compliance requirements would demand meticulous reporting of data about the investor by adding more levels for clearances, thus increasing the hurdles for the brokers whose compliance is not in place and are more vulnerable to any malicious activity,” said Mr Gagdani. 

In around March this year, SEBI had banned brokerage from pledging client securities to any third party. This was applicable even in the case the client has not paid the entire money to purchase the security. Now with the current move, even clients cannot make an off-market transfer for a loan. A transfer is possible only after marking a pledge to an NBFC directly from the client Demat account, post which the funds are credited directly to the client’s bank account.     

So basically, with the new circular, as the reporting mechanism is becoming all the more stringent, no broker would be able to use one client’s funds for another client or the brokerage firm from January 2020; thus ensuring a safer ecosystem. It focuses on minimising broker defaults by reducing the scope for leverage they could offer to the clients and fixing the legacy issue.