Last month, the regulator, the Securities and Exchange Board of India, made it mandatory for brokers to collect and report all margins in the cash segment. The notification can be viewed here.
Till now, this rule was applicable only in F&O segment. The new regulations will come into place from January 1, 2020.
Amit Kumar Gupta of Adroit Financial, notes that this is a reaction of the Karvy crisis and misuse of POA.
Brokers will have to mandatory collect the 'VAR (value at risk) margin' and 'ELM (extreme loss margin)' upfront from their clients before permitting them to enter any transaction orders in the trading system. Brokers will be required to ensure clients pay up marked to market (M2M) margin and additional margins to the broker as soon as margin calls are made by the clearing corporation or the broker.
This in a way will deter brokers from misusing funds and shares lying in client accounts as they now have to report the short collection or non-collection of margins from clients to stock exchanges. This will also help the stock exchanges keep a better tab on the client margins front and deter the brokers from meeting a client's margin call from other clients' accounts.
Brokers would be exempted from collecting upfront margins from the institutional investors carrying out business transactions and in cases where early pay-in of securities is made by the clients.
A penalty structure would also be in place to deal with instances of short-collection or non-collection of margins as well as for false or incorrect reporting of margin collection from the clients by TMs and CMs. Despite the January 1, 2020 implementation, penalties will come into place from April 1, 2020.
All said and done, it will impact retail liquidity and participation to some extent.
According to Financial Coach and Investment Adviser Mahesh Mirpuri, while all action has been taken in keeping investor interest in mind, some things have not had the intended outcome. Mutual funds have been limited by the new classification norms, while confusion continues to persist among retail investors on various fund types. Mutual funds are assumed to be a pull product, when they are not. The mayhem in the mid and small cap space and credit risk has not helped either. It certainly seems now that the investment ecosystem is favourable to the insurance sector.
According to this article the margin could be anywhere between 1.5% to 2.5%.
