THE SMART INVESTOR Higher volumes may drive M&M gains

New product launches and market-share improvement are the other triggers. RAM PRASAD SAHU writes

The market regulator, the Securities and Exchange Board of India (Sebi), has introduced several new norms that will force traditional stockbrokers to alter the way they operate. These changes aim to reduce systemic risk and minimise the chances of frauds by brokers, which occur with disconcerting regularity in India. Some of these changes came into effect from September 1, while the others will be rolled out gradually.

Pay upfront margin

Earlier, the concept of margin collection existed in derivatives, but not in the equity segment. Now a minimum margin of 20 per cent of trade value has to be collected on every transaction in the equity segment. This rule has been effective since January 1, 2020. But if there was a shortfall in margin collection, exchanges did not levy a penalty. They were going to begin doing so from September 1 but have now deferred it to September 16.

The settlement cycle in India is T+2. If a person buys shares on Monday, the exchange asks for money on Wednesday. Traditional brokers would allow customers to buy shares even if they had no money in their account. The customer would give a cheque later. If you are the client of such a broker, such flexibility will no longer be available to you.

This change of rule will not make much difference to customers of more evolved brokers. “Our online platform used to anyway charge margin prior to trade. We will only have to carry out some minor tweaks to meet these guidelines,” says Shankar Vailaya, director, Sharekhan by BNP Paribas.

The collection of an upfront margin is expected to usher in several positive changes. When a trade happens, the exchange blocks the required margin from the broker’s account. “If the broker did not have his own money to pay the margin, he would utilise the credit balance of a client who was not trading at that point. He would thereby put the latter’s funds at risk,” says Venu Madhav, chief of operations, Zerodha. This sort of malpractice is likely to end now.

End of road for high leverage

The imposition of a 20 per cent margin will also ensure that all brokers offer a uniform level of leverage now. Some brokers would offer exorbitant levels of leverage on intraday basis — as much as 50x. They would ask their clients to square off their positions before 3.30 PM, so that no margin had to be paid on their positions at the end of the day. “By insisting on a 20 per cent margin on every trade, the exchanges are regularising the amount of leverage that brokers can give intraday. Now no broker will be able to give more than five times leverage,” says Madhav.

When traditional brokers allowed trading without collecting any margin, they created systemic risk. In case of adverse market movements, they got into financial trouble. “If a client of theirs incurred a loss, brokers would chase him for money and they would also file for arbitration. The new rule should minimise litigation,” says Shrey Jain, founder, SAS Online, a Delhi-based discount broking firm.

At present, the exchanges calculate margin requirement on end-of-day positions. From December 1, peak margin reporting will be introduced. The exchanges will take four-five snapshots of positions during the day and calculate margin on the basis of the highest amount. So, the old system of taking highly leveraged bets during the day and squaring off positions before the end of the day will not work in the future.

The introduction of an upfront margin is also expected to reduce speculation by retail investors. Says B Gopkumar, managing director and chief executive officer, Axis Securities: “Many retail investors take high leverage without understanding the risks associated with it and lose their money. Now, they may focus more on building longer-term portfolios.” The negative fallout of this measure, he says, could be that overall trading volumes within the markets may decline since leveraged trades account for about 30 per cent of trading volume.

Clients need to ensure that the upfront margin is maintained with their broker at all times. “This will enable them to avoid penalty for non-maintenance of upfront margin, which could range from 0.5-5 per cent, depending upon the number of instances of such failures,” says Anupam Agal, head of operation, Motilal Oswal Financial Services.

The early pay-in route

Brokers will have to collect 20 per cent margin on sell transactions as well to safeguard against the risk that a client may sell shares but not deliver them. One route many brokers are taking to avoid having to collect a margin on sell transactions is the early pay-in route. When a client sells shares, the broker is required to deliver them on T+2. Instead he delivers them on the same day. By doing so, he avoids the obligation to collect a margin in sell transactions. Online brokers who have systems in place for quick debiting and transfer of shares have already adopted this route.

Curb on redeploying intraday profits

Earlier, if a trader made gains, he would use that money the very next day to take positions. But now he will not be able to do so. The profits come to him on a T+2 basis in the equity segment. To trade the next day, he needs to put up the required margin. The rules stipulate that only free and unencumbered balances can be utilised as margin. The profit from intraday trade is unrealised. So, brokers will not be able to give positions to clients on the basis of that money. This measure, too, could reduce intraday trading.