Despite multiple deadline extensions, the stock market’s transition to SEBI’s new framework for upfront collection of margins on cash trades and security pledging was marred by a rocky start last week. With tech glitches holding up execution, investors reported unprecedented delays in pay-ins and pay-outs from their trading accounts for the first time in years. As cash market volumes fell by 10-20 per cent, brokers, depositories and exchanges engaged in an acrimonious round of finger-pointing. This glitchy start has led to demands that SEBI recall its November 2019 circular, which ushered in the new margin rules. Conceding the demand would be akin to throwing the baby out with the bathwater, as it had many welcome elements.

The changes from September 1 contain two essential elements to protect investor interests in the aftermath of the Karvy controversy. SEBI has now allowed investors to directly pledge their shares with the Clearing Corporation, thus doing away with the earlier practice of investors lodging their shares with their brokers towards margins, rendering them vulnerable to misuse. SEBI has also disallowed the practice of brokers treating stocks in client demat accounts for which ‘power of attorney’ has been given, as collateral for trading purpose. It has also asked brokers to levy upfront margins on transactions in the cash segment just as they were doing on derivative trades, to discourage highly leveraged bets in these uncertain times. While SEBI’s new rules are undeniably well-intentioned and designed to protect retail investors from the consequences of broker fraud or misinformed trades, they do have a flip side. For one, they introduce irritants for long-term investors effecting delivery-based transactions. With both buy and sell trades attracting upfront margins now, even investors holding securities in their demat account are obliged to either cough up an advance in cash or enable early pay-in of their securities before initiating sell orders. With a significant section of brokers not yet geared for early pay-in, they’ve been requesting clients to deposit cash margins with them, resulting in undesirably high floats with the broker. Given the extant T+2 regime, the new margin rules also prevent investors from immediately using the full proceeds from the sale of shares towards new purchases or deploying intra-day profits in new trades. The new mechanism to pledge and re-pledge shares used as collateral is an improvement as the shares remain in client account and a clear trail is available. However, SEBI should see if there is scope for further simplification to smoothen the order execution process.

SEBI must try and iron out impediments for delivery-based investors by actively engaging with market participants and over time pushing for real-time settlement. It must also recognise that writing new regulations for the market at large cannot substitute stringent enforcement actions against specific brokers or market participants found to be perpetrating, aiding or abetting in securities fraud. Finally, given that the bulk of trading activity in any market originates from speculative rather than long-term investors, SEBI needs to strike a balance between protecting small investors and curtailing speculation, as the latter has adverse consequences for market depth and liquidity.

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