New Marginal Rules of SEBI – Explained


Stock market is the avenue of investment for investors and trading for speculators. According to the different sources, it is estimated that hardly 2%-3% of the Indian population invests in the stock market.

People fear losing their money, which is subject to high volatility. SEBI, the regulator of the Indian stock market, has undertaken a lot of initiatives and reform to protect the interests of the investors, and one of such new norms is on Marginal Trading.


New Marginal Rules of SEBI – Explained

Let’s have a discussion on what is it all about:

What is Marginal Trading?

To begin with the investment in the stock market, any investor needs to have a trading and Demat account. Demat account is opened with a depository to store share certificates of the investor in the e-form.

Trading account as the name suggests is required to trade i.e. buy or sell securities. This has to be necessarily opened with a Sebi registered broker like Upstox, Zerodha, Sharekhan, etc.

The broker holds cash, securities, and other holdings of the investor. Also, some brokers offer full-service and give trading advice to the investor and leverage benefits, which ensures capital adequacy and gains in the investment.

Brokers play a predominant role in facilitating investors to conduct smooth trading activities.

A trading account can be of multiple types, of these major two types are:

(a)- Cash account and

(b)- Margin Trading account.

(a) Cash account

In case of a cash account, the investor can invest in securities to the extent of cash balance in his account and cannot borrow from the brokers to acquire more shares.

Suppose if you have Rs 5,000 in your account, you can acquire securities worth Rs 5,000 and not beyond that.

(b) Marginal account

Margin means leveraging, i.e. including debt to the capital. Marginal account provides the opportunity to buy more securities above your cash balance in the account.

You can borrow from the broker to buy securities and gain higher returns, and securities will be the collateral to get this leverage benefit. Once the positions are squared off, you need to return the money borrowed from the broker with interest.

Suppose you have invested Rs 5,000 in the stock market, and you want to buy shares of XYZ ltd worth Rs 7,000, as you are bullish about the future trend, for which you don’t have money. Now you can buy these shares, by borrowing this money from the broker and this facility is called the Marginal Trading Facility.

There is a high risk involved in the Marginal Trading Facility. If you earn a higher return than the interest payable on the amount, then it is beneficial to the investor. Otherwise, if the market turns bearish and the price of the securities drop, then there will be a haircut on the capital invested by the investor. And the broker will deduct the loss amount from your capital along with the interest due.

What are the new Marginal Trading rules of the SEBI?

The new Marginal Trading rules imposed by SEBI aims at higher transparency and prevent brokers from misusing the securities.

Even though norms were announced in the month of February, the date of implementation got postponed twice from 1st June, 1st August and finally, it is implemented from September 1st, 2020.

The new norms are explained as follows:

(1) Transfer of collaterals

Shares pledged with the brokers will continue to remain in the Demat account of the client and can be directly pledged with the clearing corporation i.e. National Securities Depository Limited (NSDL) and Central Depository Securities Limited (CDSL). Investors will enjoy dividends and other benefits over the securities.

In the previous system, clients were supposed to pledge securities with the broker with Power Of Attorney (POA) and few brokers misused it, by re-pledging with others to raise funds or dividends, and other benefits were not transferred to investors account promptly on time.

(2) Upfront Margin Collection

Upfront Margin is nothing but advance, it is mandatory to collect upfront from the investors by the broker for the purchase or selling of securities. Otherwise, it leads to heavy penalties. Collecting 30% upfront is mandatory now to provide margin facilities. Investors will have to sign a separate form to avail of this benefit.

(3) Power Of Attorney

Unlike the previous system, there is no need to assign POA to brokers, as securities are directly pledged with the clearing corporation through investors’ broker account.

In the previous system, it was mandatory to sign a Power of Attorney with the broker, where misuse is found in a few cases.

(4) To Avail Margin

To avail margin, Investors need to create a Margin pledge separately, which was not required in the previous system.

(5) Margin Loan

Collecting upfront of 20% – 30% from the investors is required to avail Margin loan, which was earlier 10% or less provided by the broker.

For instance, if you want to buy 100 shares worth Rs. 10,000 in intraday, you must have 20% of 10,000 that is Rs. 2000 to avail margin loan worth 8000 to buy 100 shares.

(6) Using Intraday profits

Using intraday profits on the same day is not possible now. Earlier profits earned on intraday were used to take new positions in the market, which is not possible now, as investors will be able to use it after ‘T+2 days’. Once a trader gets profit into his account, they can use it.

For example, according to the new rule, If you sell shares on Monday, then Wednesday (Today + 2 days) is the settlement of the transactions and the sale proceeds can be used to buy new securities only after settlement and not on the day of sale.

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Advantages of new marginal trading rules

In the current system, clients are required to get a one time password, processed by the clearing corporation to pledge the securities. Later these securities are re pledged by the brokers with the clearing corporation to avail the marginal facility.

This ensures transparency in dealings. And pledged shares will continue to remain in the investors’ account, which gives the clarity status of investment to the investors.

Intraday profits cannot be utilized, i.e. only after ‘T+2’ settlement, funds can be utilized for taking positions. This refrains investors from trading on notional money.

In the previous system, brokers were custodians of securities, and few brokers are found to have misused the system by not transferring dividends to the investors or using investors’ securities as collateral to raise loans, etc.

Therefore the SEBI has brought out this new system where the investors need not create Power Of Attorney, pledge the securities with brokers, etc, ensuring the protection of investors’ funds and investment.

Now investors are required to pay margin on the buying & selling of securities, which ensures liquidity to the broker, thereby bringing operational efficiency in the market.

For the Margin required on the selling of securities, most brokers settled the security on the same day instead of like earlier it was used to settle in T+2 days.

Overall, it is an attempt by SEBI to ensure transparency, liquidity, and efficiency in the stock market by protecting the funds and securities of all investors and get control over brokers.

3 thoughts on “New Marginal Rules of SEBI – Explained

  1. Priyanka Bagani says:

    If someone thinks investing is gambling, then they’re doing it wrong. The work involved requires planning and patience.

    Do your homework before making a decision. Once you’ve made a decision, make sure to re-evaluate your portfolio on a timely basis. A wise holding today may not be a wise holding in the future

    I learnt few things from your article above like upfront margin collection amongst many others. It’s a good knowledge source above. Thank you and keep writing !

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