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To make the Indian capital markets more vibrant, the capital markets regulator, the SEBI has decided to introduce margin finance and securities lending.
Under the new margin trading, a broker can borrow funds from banks and RBI-registered NBFCs and on-lend these funds to clients. The new system is different from the prevailing margin trading norms where banks are allowed to lend only to brokers, but brokers in turn cannot on-lend the funds to clients.
Under the proposed system, only corporate brokers with minimum net worth of Rs 3 crore can undertake such activities; they can lend up to five times their net worth.However, the facility of margin trading will be available only for stocks in Group-1 of the SEBI risk management system, numbering around 150.
For margin trading, a client has to pay 50 per cent margin, while the rest is funded by the broker.In addition, the borrower will have to put up a maintenance margin of 40 per cent. Maintenance margin will be applied if the stock price goes against the investor who has availed of the facility of margin finance. Anytime during the process, if the margins fall below 30 per cent, the broker has the option of liquidating the position. Margins have to be paid on T+1 basis.
On the securities lending and borrowing system, clearing corporations of the stock exchange would be the nodal agency. Now, anybody can go to the clearing corporation for lending or borrowing of securities. In the earlier system, there were several agencies such as Stock Holding Corporation of India for securities lending, but they used to lend only to select investors, due to which the system was also not successful.
The margin system is not similar to the banned carry forward system or badla. It is a transparent and internationally accepted system. Margin trading allows investors to buy stock by paying a part of the value with the rest being financed by the broker. Such financing helps investors leverage their funds several times. In securities borrowing and lending systems, a player in the market who has sold shares without holding securities (short-selling) borrows securities from others and delivers the shares to the buyer.
.... Click for more on stock market
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