‘Leveraged trades can become a worry for mkts’

As the new margin requirement norms kick in on September 1, under which 100 per cent upfront payment would be required for initiating even intraday positions,

DEVEN CHOKSEY, managing director at KR Choksey Investment Managers, tells Nikita Vashisht in an interview that while Sebi may have achieved the purpose of tightening the screws on trading activity, the cost of trading may rise. Edited excerpts:

Do you see the new margin rule impact trading in any way?

I do not think the new rule is not understood by traders, they understand the implications very well. The cost of trading will only increase as the rules keep tightening. There will be a number of people who have to leverage while trading for the kind of margin that is now required. This will burden the system and increase the cost of funds as well. While Securities and Exchange Board of India (Sebi) may have achieved its objective of tightening the screws on trading activity, the reality is that the cost of trading may rise.

How will this get reflected in daily trading activity?

Well, it has to reflect somewhere. Either it will increase the leverage — people will borrow to invest and make up for the margin requirement — that is outside the purview of Sebi. This could eventually become a problem. In my view, while solving one problem, another bigger problem will likely get created. It is

Sebi’s duty to look into that as well.

Will Sebi relent and provide some relaxation over the next few months if such leveraged trades are spotted?

I do not think so. Sebi is managing one side of the risk, which is to curb speculative activity, the other side (leverage-related risk) will open up. The leverage business, I believe, comes under the purview of the Reserve Bank of India (RBI) and Sebi does not look into such matters. Ultimately, leveraged trades can become a worrying factor for the markets.

Will there be a significant impact on buy today, sell tomorrow (BTST) trades?

It will only increase the cost of funding. Traders who are used to this market segment may again resort to leveraging and create a problem. To that extent, their trades will get impacted. That said, it may also act as a deterrent for BTST trades. Ideally, Sebi and the RBI should work together and create a leverage market in the same system, which has been a long-standing demand of traders. Leveraging should not happen outside the market. If it happens within the contours of the market, we will be able to ascertain the amount of risk the market and the trades carry.

Will trading volume get impacted?

Initially, it may have some impact on the mid- and small-cap stocks. However, it will settle down as trade progresses, and investors, traders, and brokers come to terms with the new arrangement.