New Margin System: To increase the security of the stock market, SEBI has introduced a new margin system from September 2020. Let us understand here in simple words what is the new margin system and how will it impact clients, investors, traders, brokers, exchanges, and depositories.
What is the new margin system?
The time to trade in the stock market without depositing the initial margin is over. It is now mandatory to deposit margin for short-term or long-term deals or day trading. Earlier brokers used to do business by depositing these margins on behalf of their clients. Now that won’t be possible.
The Securities and Exchange Board of India (SEBI) has clearly stated that the margin for its transactions will have to be filled separately by the customer. For the past several years most investor-traders have been used to trading without depositing an initial margin.
SEBI has now stopped trading without margin from 1st September. This new system of SEBI is necessary for the security of the market. SEBI will now have to make the exchanges and brokers aware of the system and create awareness among the customers.
Effect of new margin system on the stock market:
According to SEBI, these systems are in everyone’s interest. This will increase the level of security of the market. The importance of margin is high for the security of the transaction in the stock market.
The broker himself also makes sure that proper and timely margin is deposited from the clients. Many times the broker himself provides the facility of dealing with the clients by depositing the margin.
There are crores of intra-day deals in the market every day. As per the new rules, intra-day trading could not be done without the client’s own margin, which may impact the trading volume initially. The biggest impact can be on day traders and small investors.
Collateral will no longer work
Till now the broker used to have collateral of shares, out of which the broker himself paid the margin to the clients. It was meant whether the exchange gets to deposit margin or not. Thus the clients were free from the burden of initial margin.
This practice will no longer work. Now every customer has to fill his margin separately. Investors will no longer be able to buy on the same day as the sale amount.
Margin to be filled even on sale deal
Margin has also been levied on sale transactions. Shares will have to be pledged in the form of margin even after selling to the customers. However, in the sale transaction, if the customer supplies the shares on the same day, he need not pay any margin. This can happen only if the customer’s Demat account is with his broker.
If the Demat account of the customer is with the bank or other institution, then the customer may face problems in making the supply on the same day. In such a case, he will have to pledge his shares as margin.
Important points of the new margin system.
- SEBI’s new margin system is for the safety of the market, it will also increase the security of the brokers.
- The client has to deposit the liquidated shares as a margin at the time of purchase or sale. So these shares have to be pledged. By doing this there is no need to deposit the amount as a margin.
- The pledged shares will become free after the transaction is completed. Penalties may be levied if the account does not have sufficient margin prior to a transaction.
- The customer will receive OTP from CDSL/NSDL by SMS or E-mail for pledging the shares, which will have to be entered in the link of the CDSL/NSDL website provided by the customer.
- If you want the benefit of margin against daily trading, the pledge process has to be completed through OTP on the trading day itself. If the pledge is not processed on that day, the margin may be lost on the trading day.
- Trade-for-trade and high volatility stocks, which have significant margin value, may not provide margin.
Demat account should be updated
- Trading and Demat accounts should have the correct mobile number and e-mail ID. It takes two days for changes in mobile and e-mail, as these changes are verified in depositories and exchanges. Such a change is not possible at the last minute.
- The broker will initiate the pledge process through its auto-pay-in POA, but the same will be handled and accepted by the client through OTP.
- If an investor does not do any transaction in any segment for 12 months, that account will be marked as Dominant Inactive.
- Under no circumstances will this account be allowed to transact without re-doing the entire KYC process.
- This RE-KYC process takes a day or two. So doing one or two trades from time to time will not require a KYC process.