The Securities and Exchange Board of India has introduced margin trading in stocksnin the cash segtment i.e.inthe equities market. This facility is available from February 1, 2004. 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. The measure is intended to impart liquidity to the market and further increase the depth of the equity market. Details of thescme allowing Margin Trading as intimated by SEBU in its Circular SEBI/MRD/SE/SU/Cir-15/04 dated March 19, 2004addressed to the Stock Exchanges atre given hereunder:
Securities Eligible for Margin Trading
The securities included in Group 1 would be eligible for margin trading facility. The securities having mean impact cost of less than or equal to 1 and having traded on atleast 80% (+/-5%) of the days for the previous eighteen months, have been categorized as Group 1
Eligibility Requirements for Brokers to Provide Margin Trading Facility to Clients
Only corporate brokers with a "net worth" of at least Rs.3.00 crore would be eligible to offer margin trading facility to their clients. The "net worth" for the purpose of margin trading facility would mean "Capital" (excluding preference share capital) plus free reserves less non allowable assets, i.e fixed assets, pledged securities, member’s card, non-allowable securities, bad deliveries, doubtful debts and advances (including debts and advances overdue for more than 3 months or given to associates), pre paid expenses, intangible assets and 30% of the marketable securities
The broker shall submit to the stock exchange a half-yearly certificate, as on 31st March and 30th September of each year, from an auditor confirming the net worth as specified abovde. Such a certificate shall be submitted not later than 30th April and 31st October of the year.
Agreement (Client with broker)
1 The broker shall enter into an agreement with his client for providing the margin trading facility, on the lines of the model agreement, enclosed as Annexure 1(to the circular). The broker/exchange may modify the agreement only for stipulating any additional or more stringent conditions, provided that no such modification shall have the effect of diluting any of the conditions laid down in the circular or in the model agreement.
Source of Funds for the broker for providing margin trading facility to his clients and maximum permissible borrowing by any broker
For the purpose of providing the margin trading facility, a broker may use his own funds or borrow from scheduled commercial banks and/or NBFCs regulated by RBI. A broker shall not be permitted to borrow funds from any other source.
The broker shall not use the funds of any client for providing the margin trading facility to another client, even if the same is authorised by the client.
At any point of time, the total indebtedness of a broker for the purpose of margin trading shall not exceed 5 times of his net worth, calculated as per provisions of this schme
The "total exposure" of the broker towards the margin trading facility shall be within the self imposed prudential limits and shall not, in any case, exceed the borrowed funds and 50% of his "net worth". The term "total exposure" will mean the aggregate outstanding margin trading amount in the books of the broker for all his clients.
While providing the margin trading facility, the broker shall be prudent and also ensure that there is no concentration on any single client. In any case, the exposure to any single client at any point of time shall not exceed 10% of the "total exposure" of the broker, calculated as above.
Margin Requirements
The initial and maintenance margin for the client shall be a minimum of 50% and 40% respectively, to be paid in cash. For this purpose;
"initial margin" would mean the minimum amount, calculated as a percentage of the transaction value, to be placed by the client, with the broker, before the actual purchase. The broker may advance the balance amount to meet full settlement obligations.
"Maintenance margin" would mean the minimum amount, calculated as a percentage of the market value of the securities, calculated with respect to the last trading day’s closing price, to be maintained by the client with the broker.
When the balance deposit in the client’s margin account falls below the required maintenance margin, the broker shall promptly make margin calls. However, no further exposure can be granted to the client on the basis of any increase in the market value of the securities
The exchange/broker shall have the discretion to increase the margins mentioned at 1.6.1 above and in such a case, the margin call shall be made, as and when required
Liquidation of securities by the Broker in case of Default by the Client
The broker may liquidate the securities if the client fails to meet the margin call made by the broker or fails to deposit the cheques on the day following the day on which the margin call has been made or where the cheque deposited by the client has been dishonoured.
The broker may also liquidate the securities in case the client’s deposit in the margin account (after adjustment for mark to market losses) falls to 30% or less of the latest market value of the securities, in the interregnum between making of the margin call and receipt of payment from the client.
However, the broker shall not liquidate or use in any manner the securities of the client in any situation other than the ones mentioned at above.
Records to be Maintained by Broker
The broker shall maintain separate client wise accounts of the securities purchased on margin trading with depositories and shall enable the client to observe the movement of securities from his account (through internet). The broker shall also maintain a separate record of details (including the sources) of funds used for the purpose of margin trading.
The books of accounts, maintained by the broker, with respect to the margin trading facility offered by it, shall be got audited on a half yearly basis. The broker shall submit an auditor’s certificate to the exchange/s, within one month from the date of the half year ending 31st March and 30th September of a year certifying, inter alia, the extent of compliance with the conditions of margin trading facility. This certificate is in addition to the certificate on net-worth specified earlier
SEBI and the stock exchange/s shall have the right to inspect the books of accounts and/or any other documents maintained by the broker with respect to the margin trading facility.
Disclosure of exposure to the Margin Trading Facility
The broker shall disclose to the stock exchange/s details on gross exposure including name of the client, Unique Identification Number (UIN) under the SEBI (Central Database of Market Participants) Regulations, 2003, name of the scrip and if the broker has borrowed funds for the purpose of providing margin trading facility, name of the lender and amount borrowed, on or before 12 noon on the following day.
The stock exchange/s shall disclose the scrip wise gross outstanding in margin accounts with all brokers to the market. Such disclosure regarding margin trading done on any day shall be made available after the trading hours on the following day, through its website.
The formats for such disclosures by the broker to the exchange and the exchange to the public are enclosed at Annexure 2 and 3 respectively.
The stock exchanges shall also put in place a suitable mechanism to capture and maintain all relevant details including member-wise, client-wise, scrip-wise information and source of funds of the members, pertaining to margin trading on their exchange, both on daily as well as on cumulative basis.
Arbitration
The arbitration mechanism of the exchange would not be available for settlement of disputes, if any, between the client and broker, arising out of the margin trading facility. However, all transactions done on the exchange, whether normal or through margin trading facility, shall be covered under the arbitration mechanism of the exchange.
Investor Protection Fund and Trade/Settlement Guarantee Fund
The amounts lying in the aforesaid funds would not be available for settling any loss suffered in connection with the margin trading facility. However, the aforesaid funds will continue to be available for all transactions done on the exchange, whether normal or through margin trading facility.
General Provisions
The brokers wishing to extend the facility of margin trading to their clients would be required to obtain prior permission from the exchange/s where the margin trading facility is proposed to be provided. The exchange shall have the right to withdraw this permission at a later date, after giving reasons for the same.
A broker should take adequate care and exercise due diligence before providing margin trading facility to any client. Any broker providing margin trading facility to a client shall ensure that the client has obtained a Unique Identification Number (UIN) under the SEBI (Central Database of Market Participants) Regulations, 2003.
A client will be allowed to obtain margin trading facility from one broker per exchange for buying securities in that exchange. To ensure this, it shall be obligatory on the part of every broker to,
obtain a declaration from his client whether he has availed of any margin trading facility from any broker in any exchange, or whether his request for margin trading with any broker was rejected and if so, in both the cases, obtain the name of the broker and his registration number; and
also verify the details from the concerned broker/s.
Before providing margin trading facility to a client who has already availed of margin trading facility from another broker in the same exchange, the broker shall ensure that the client has liquidated his outstanding in the margin trading account with the other broker, and obtain a certificate to this effect in writing from that broker.
