SEBI’s New Margin Pledge Rule Effective from

September 1st 2020

As we all know there is a lot of chaos going on these days just 2 topics: i.e. Margin Requirement & creation of pledge. There is a lot of confusion in the minds of investors. So we are here to give you knowledge on these topics in the utmost simple language that can be easily understood by all the investors.

 1. MARGIN REQUIREMENT

 Our market regulator, SEBI (Securities and Exchange Board of India) has introduced new margin pledge rules effective 01 September, 2020, to safeguard the interests of the investors.  

 Accordingly, clients will have to pay upfront margin for any CASH EQUITY transaction as well. While, this margin can be in form of cash or shares, the process for keeping shares as margin has undergone a change.

First let us understand What are the meaning of Pledging, Margin Pledge & Margin Re-pledge?

• Pledging: refers to the process of using your stocks as securities to avail a loan.
• Margin pledge: Investor holdings will not get physically transferred to the broker’s collateral account, instead it will only create a lien in favour of the broker through which the investor can trade/create positions. This leg is referred as margin pledge.
• Margin Re-Pledge: The broker, in turn, will get limits and further pledge the holdings in favour of CM/CC through a process called margin re-pledge.

Earlier Scenario: Transfer of securities to the demat account of the TM / CM for margin purposes was allowed. In case, a client has  given a power of attorney in favour of a TM / CM, such holding of power of attorney  shall be considered for collection of margin by the TM / CM  in respect of securities held in the demat account of the client.

Current Scenario: From now onwards, TM / CM shall, inter alia, accept collateral from clients in the form of securities, only by way of ‘margin pledge’, created in the Depository system. The concept of Power of attorney for margin is no longer prevailing.

Earlier Scenario: The broker utilises the investor’s collaterals by pledging the same to the clearing members/clearing corporations (CMs/CCs) to get limits/margins for itself to fulfil the investor’s margin obligation.

Current Scenario: Now for the purpose of providing collateral in form of securities as margin, a client shall  pledge securities with TM, and TM shall re-pledge the same with CM, and CM in turn shall re-pledge the same to Clearing Corporation (CC). The complete trail of  such re-pledge shall be reflected in the de-mat account of the pledgor. The stocks will now remain in client’s demat account only but will be marked as pledge in the favour of broker.

Effect of new policy: After the shift to new mechanism, brokers would be mandated to release all the shares lying in their existing collateral accounts to the demat accounts of respective investors and close their collateral accounts and take shares only through the new  mechanism.

The CM/CC will give limits to the broker only to the extent of investor’s margin requirement irrespective of the value of shares re-pledged by the broker. Apart from this, transparency in the new mechanism will give confidence to investors with respect to their holdings being safe.

2. CREATION OF PLEDGE

Investors wanting to take exposure by using their demat holdings will now have to pledge their holdings in favour of the broker through which they trade as against the current mechanism where the investor’s shares were physically transferred to the broker’s collateral account from the investor’s demat account.

To create the pledge, the investor may initiate a request on his/her own or may confirm the request initiated by the broker through use of an OTP (one time password).

Process for pledging of shares is as follows:

1. Ascertain the number of shares you want to pledge & accordingly give instruction to your AP/Broker.
2. Once we have processed the pledge request received from your side, you will receive a link on your registered email ID or mobile number.
3. Visit the link you have received on your registered email ID or mobile number.
4. Once you’ve clicked on the link, you will be redirected to CDSL’s webpage where you are required to enter your PAN number and generate an OTP.
5. Enter the OTP & submit, you will see confirmation message on the screen.

In client account, margin pledge  or re-pledge shall be reflected against each  security, if it is pledged / re-pledged and in whose favour i.e. TM / CM / CC.

Apart from the challenges at the investor’s end, depositories also need to be geared up to put the systems in place to ensure that the feature can be made available real-time through the use of API. If the pledge instructions are processed with any time delay, it may end up in investors not getting the limits on a real-time basis to trade/create positions and, thereby, end up executing trades at a different rate altogether.

Sources: SEBI, Economic Times