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SEBI Grants One-Time Extension To Brokers To Implement New Margin Trading Norms

SEBI has allowed brokers to continue granting margin against clients’ shares through a power of attorney till the end of August.

The SEBI building in Mumbai. (Source: BloombergQuint)
The SEBI building in Mumbai. (Source: BloombergQuint)

The market regulator has granted brokers a month’s time to implement some of the new rules covering margin collections, aimed at curbing risks and formalising leveraged trading.

The Securities and Exchange Board of India allowed them to continue granting margin against clients’ shares through a power of attorney till the end of August. But no further extension will be granted to stock brokers, the regulator said in a circular after brokers made representations regarding the difficulties in implementing the new margin trading norms.

In January, SEBI had issued a circular to address cases involving misappropriation of clients’ securities by a stock broker. According to the new norms, brokers will have to collect the margin before execution of trade by their clients. The regulator had intended to introduce the circular from June 1 but deferred it till Aug. 1 due to the Covid-19 outbreak. To be sure, the new system will run parallel to the previous format till Aug. 31.

According to SEBI’s new margin trading norms:

  • Brokers must align their systems and accept client collateral and margin-funded stocks through pledging.
  • They are allowed to hold funded stocks for margin funding in their “client trading securities Account” till Aug. 31.
  • Existing demat accounts that are tagged as “client margin or collateral” must be closed by Aug. 31. Brokers will have to transfer all securities lying in such accounts to their clients’ demat accounts.

SEBI has directed stock exchanges and depositories to disseminate this information through their websites.

The regulations to prevent the potential misuse of client securities to borrow money by brokers assumed significance after Karvy Stock Broking Ltd. allegedly unauthorisedly pledged client shares to raise funds from the lenders for its own use. The regulator in its Nov. 22 order, had barred the brokerage from taking on new customers. The shares have since been transferred from the broker’s pool account to client accounts.