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New Sebi rules may alter how you trade in stocks

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After the Karvy fiasco last year, where the broker used the loopholes in the system to use investors’ money for its own benefit, the capital markets regulator came out with various regulations to plug the cracks and strengthen the regulatory framework so that such events can be avoided in future. These new regulations relate to equity as well as derivative markets.

The new regulations are investor-friendly as they reduce risk and bring in more transparency. “The new mechanism gives more power to investors and brings more transparency in the broking ecosystem,” said B. Gopkumar, managing director and CEO, Axis Securities.

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Trading activity in shares has gone up manifold in recent times, especially after the covid-19 crisis broke out. But you need to be mindful of the new rules laid down by the Securities and Exchange Board of India (Sebi) regarding stock trading, which will be implemented between 1 September and 1 December in a phased manner.

After the Karvy fiasco last year, where the broker used the loopholes in the system to use investors’ money for its own benefit, the capital markets regulator came out with various regulations to plug the cracks and strengthen the regulatory framework so that such events can be avoided in future. These new regulations relate to equity as well as derivative markets.

The new regulations are investor-friendly as they reduce risk and bring in more transparency. “The new mechanism gives more power to investors and brings more transparency in the broking ecosystem,” said B. Gopkumar, managing director and CEO, Axis Securities.

Here is how some of the changes that have come into effect from 1 September will affect the various ways in which you trade.

Delivery of shares

In this case, your trading is largely unaffected. This is particularly true for bank-owned brokers where margin money or stocks from the linked bank account is “blocked” by the broker at the time of placing the trade. In case of a buy transaction, the bank-owned brokers typically block the entire money due at the time of placing the trade. Stocks are blocked by the broker in case of a sale transaction.

With the current regulations, brokers will not just block the funds but also debit them at the time of trading. This can be either 20% of the trade amount (the minimum stipulated amount) or the entire sum. “For example, if you buy Asian Paints shares worth 100. Earlier, the entire 100 would be debited on the subsequent day (T+1) to enable the broker to pay on T+2. Now 20 will be debited on the same day,” said Deepak Jasani, head of retail research at HDFC Securities. “If you sell Asian paints worth 100, either you deposit a cash margin of 20% of the value (of the securities) in advance or transfer all the securities in advance to the broker’s account on the same day from your demat account, instead of on the next day,” he added.

This will lead to a minor loss of interest on the money parked in your bank.

Rajesh Baheti, director at Association of National Exchanges Members of India (ANMI), termed it as a “shift from postpaid to prepaid”. “Most online brokers were anyway taking cash or the securities upfront on the day of trade. This is because the nature of their business means they don’t know the customer well. This will impact offline brokerages more as they were highly dependent on customer relationship and used to take money and stocks, on a post-paid basis, the day after placing the trade,” he added.

Intraday trading

You will now not be able to use profit from intraday trades for further trading on the same day. Such profits are reflected in T+2 days. “For example, the trading profit from an intraday trade on Monday can be used only on Wednesday for further trade activities,” said Nithin Kamath, CEO, Zerodha, a discount broking firm.

For investors who want to do a bulk of intraday trades, the requirement of margin money will increase as they won’t be able to fund it, partly or fully, with the intraday profits made earlier in the same day. Unless they fulfil the minimum margin money requirement, they wouldn’t be able to avail of leverage, if required. Before the new regulations came into effect, there were no standard limits with regards to the amount of leverage on margin requirement a broker could provide to its clients. Brokers even provided leverage of up to 100% of the margin money needed for intraday and other trades.

“Many brokers used to provide leverage or margin funding facility, allowing clients to buy without any margin requirement. The brokerage firms earned a percentage value of the trade in this arrangement. But this practice will now have to stop as it is mandatory for everyone to collect at least 20% of the trade value as margin upfront, said Kamath.

While in the near term, this might be painful, in the long term, fewer leverages will be equal to lower risk and will protect the interest of the broking community and the investors as well, said Kamath. While the investors will take fewer loans, the brokers will face less risk of defaults.

Pledging of shares

In case an investor pledges shares for margin requirement, the shares will not move from the demat account of the investor, but a lien will be created in favour of the broker. Earlier, the pledged shares were transferred by the broker in its demat account using a power of attorney (PoA) and at times were used by the broker like it happened in Karvy’s case.

Once the lien is created, the broker will, in turn, pledge the holding to clearing corporations for the margin requirements. The broker will have to take the permission of the investor through a one-time password (OTP) based method before doing so. “It offers further safety to customers through the additional measure of OTP authentication for pledge authorization,” said Gopkumar.

There are other benefits too. “Further, benefits from corporate actions, such as dividend and right issues, are now directly credited to the customers’ account which earlier used to come in the demat account of the broker,” said Gopkumar.

The new regulations will certainly benefit investors. Consult with your broker to understand the changes properly.

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