Now, Pledge Your Portfolio to Get Margin Funding
Clients can trade in shares worth 4 lakh by putting in only 1 lakh in cash or by pledging existing shares
Mumbai: Investors can now buy shares by pledging their stock portfolio with stock brokers. The Securities and Exchange Board of India (Sebi) has allowed brokers to offer a margin funding facility that does not mandate clients to bring cash upfront to initiate a leveraged trade. Brokers have begun offering this facility to clients that would allow them to buy shares worth over four times the pledged value.
Earlier, only non-banking financial companies were allowed to offer such margin products.
Margin funding refers to lending money to clients to trade in shares, for which the brokerage charges an interest. For instance, a client can trade in shares worth ₹ 4 lakh by putting in only ₹ 1 lakh in cash or by pledging existing shares, while the rest is financed by the brokerage.
Earlier, RBI rules required investors to cough up margins of 50% of the trade to take a leveraged bet on a share. But it never took off as investors found it expensive. Then brokerages started lending to clients at much lower rates of 18-20%, much to the discomfort of the capital market regulator, which recently tweaked the rules.
The new Sebi rules have resulted in lending rates coming down to as low as 22.5%. The lower rates are for bluechips and stocks that are also part of the futures and options segment.
“The new Sebi circular on margin funding will help retail investors to take positions by paying a small margin, like the F&O segment which will indirectly push or develop the cash market in India” said Kamlesh Rao, managing director, Kotak Securities, which launched this facility on Monday. “With this changes, there is a tremendous scope for broking houses to lure investors and traders into the cash market”.
In India, the size of cash market is significantly lower than the F&O market. The average daily turnover of equity cash market in India is about ₹ 24,550 crore compared with ₹ 5,05,600 crore turnover of F&O segment in 2017.