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SEBI's Makeover on Margin Requirements

Published on Mon, Apr 02,2012 | 13:00, Updated at Mon, Apr 02 at 18:49Source : 

By: Rushab Dhandokia, Institute of Law, Nirma University

Stockbrokers are crying hoarse over the new circular issued by the market regulator, SEBI on margin collection which came into effect from September 1, 2011. The said circular CIR/DNPD/7/2011 was issued on August 10, 2011 which states the new penalty norms for short or Non-collection of Margin money from the clients with respect to F&O transactions.

Before we analyze the impact of the said circular it is necessary to understand the concept of Margin collection and its importance.

Margins play the same role what insurances do. Just as we are faced with day to day uncertainties pertaining to health, life etc. and take steps to minimize them, similarly, the uncertainties in stock exchanges refers to the changing prices of the scripts, hence in order to tame this uncertainty we have margin mechanism.

Margins are collected by the brokers from their clients and are submitted to the relevant stock exchange.

It is very important to understand that for every buyer there is a seller hence Margin is levied on the seller also to ensure that he/she gives the shares sold to the broker who in turn gives it to the stock exchange. Margin payments ensure that each investor is serious about buying or selling shares.
Margins also ensure that buyers bring money and sellers bring shares to complete their obligations even though the prices have moved down or up.

However a close read of the circular symbolizes that the regulator has a Bigger objective this time.
The important clauses of the circular are as follows:-
For short or non-collections (per client per segment per day) up to Rs one lakh and up to 10 per cent of applicable margin, the penalty would be 0.5 per cent per day and,
For short or non-collections (per client per segment per day) of Rs one lakh and above or 10 per cent and above of applicable margin, the penalty would be one per cent per day.
If the short or non-collection of margins for a client continues for more than three consecutive days, then penalty of 5% of the shortfall amount shall be levied for each day.
If the same takes place for more than five days in a month, then penalty of 5% of the shortfall amount shall be levied for each day, during the month.
However, if the shortfall is caused due to movement of three per cent or more of the index the penalty would be levied only if the shortfall continues for T+2 days.
Non reporting of margin = 100% of  the shortfall, and  
False reporting of margin= 100% of the falsely reported plus suspension of trading for one day in that segment.
It must be noted here that shortfall of even one rupee would amount to the equivalent penalty.

Apart from the above mentioned clauses, the most daunting change that the regulator has come up in the circular is that the onus of collecting the margins is left on the stock exchanges whereas previously it was the responsibility of the brokers.

Where the brokers before had some discretion to give some leeway to their clients, the situation post this circular is that the brokers have no choice but to pay the difference from their pocket or to accept the penalty.
As per the old structure, there was no penalty, if the margin shortfall was less than 1% of the applicable amount. On the higher side, the penalty was Rs 1,000, or 0.1% of the shortfall (whichever is higher), subject to maximum of Rs 1 lakh.

What has compelled the regulator to go so harsh? Has it foreseen something that we haven’t yet? Does it perceive certain huge risks?
As discussed earlier margins acts as insurance that help in reducing the volatility in the markets, and given the wretched condition of the economy & markets globally, which have tremendously affected the local markets, we can safely assume that the reason for passing this “Speaking Circular” is to reduce the impact of global turmoil on the local markets.

If the assumption falls to be true, then the regulator has taken the best measure to cut down the risk as the new norms will increase cost of trading and hence clients will prefer to stay away from the market thus in the near term bringing down the volumes in the market.

Further to substantiate on this step taken by the watchdog it can be argued on behalf of the regulator that it was absolutely right in passing this circular as markets have undergone severe bruises given the week global conditions. Just 21 days after the circular came into effect, i.e. on 22 September, 2011 the major Indian bourses felt the global heat when Nifty on a single day was down by sharp 4.08%, where as the mighty Sensex was eroded by unbelievable 704 points.

The effect of this circular is that brokers may not think twice to cut client positions to reduce the margin shortfall resulting in losses. 
A broker as per BussinessLine has reported that -  “Our average daily volume of Rs 20 crore came down to Rs 6 crore last Friday” (i.e. on 2 September,2011).  The average daily turnover on the BSE was in excess of Rs 2,600 crore since May. But it fell to around Rs 2,100 crore in September.”

Hence the Bigger objective of SEBI to shrink retail volume has fallen apt.

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