Stock brokers and day traders in India are a worried lot these days. SEBI has announced new margin norms, which is changing the 30-year old practice of simple buying and selling of stocks in the cash segment. Rakesh Bhandari, Director, Nirmal Bang, a Mumbai brokerage, shares his views on how the industry is staring at material changes that could severely affect them. Excerpts:

What are your views on SEBI’s new margin norms? How has life changed for brokers since March?

The change has been to the extent that the market share of online broking business is now around 70 per cent, up from 40-45 per cent earlier. The new margin norms introduced are enhanced margin requirements. The full impact of these will be known from December once these come into play entirely. For the first three months, 25 per cent peak margin has to be collected, and thereafter the slab increases every quarter. So, the maximum leverage one can get in derivatives has been limited to four times up to March 2021, and it will fall further. It is good that such norms will be implemented in a phased manner. Nevertheless, it will hurt both traders and brokers, as leverage will eventually fall to zero. It will bring down options trading volumes, where people earlier got five to 10 times leverage. The rules could erase the differentiation between various derivative products.

Isn't the 100 per cent upfront margin in the cash segment rule from August unprecedented?

This is poison. It will instantly hit at least 20 per cent volumes in the cash segment. There has to be a rationale behind such a rule. The cash segment has absolutely no risk and brokers are funding it with their own money. We are still trying to understand the reason for such a rule. Several nuances (at play) have been ignored in bringing this rule. For instance, a broker could have several accounts from the same family and trading limits are extended on relationship and trust. Also, stringent compliance was never compromised and nobody complained. But all that will end now. The business model of stock brokers is up for a toss; it will burden the retail investors as they will have to give 100 per cent upfront margin in the cash segment. We are discussing the issue with the regulator.

Is stock broking heading the telecoms industry way, where only the top few will survive?

It is harsh to say that. As of now, that is not the case. Telecom companies have wider penetration compared to brokers who have so far spread their business only in large towns and cities. Discount brokers are highly competitive and aggressive in acquiring new customers, but brokers with high compliance and risk management will keep growing. Investors and traders need good research, which discount brokers cannot provide them. Traditional brokers will play a role here and get business. Different clients have different needs and one kind of broker cannot fulfil them. Our client relationships go back 25 years and discount brokers have not been able to take them away. People are talking about a spike in the number of new accounts during the lockdown but that does not necessarily translate into activity.

But going by the sharp spike in non-institutional activity, are we near peak retail euphoria?

It is early to call a peak. Although over 25 lakh new retail accounts have been added in the past three-four months, there is still immense scope for more.

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