Over the past few months, the market regulator Securities & Exchange Board of India (SEBI) has issued a number of guidelines in order to improve transparency at all levels of the capital market. The latest in the series of changes is the Stock Margin Pledging rules, which intends to bring more clarity to the client.
After two rounds of delays, the Stock Margin Pledge Rule has been put into effect from September 1, 2020. It was first announced by the market regulator way back in February 2020. However, the ongoing Covid-19 related shutdown delayed its implementation.
What is the new Stock Margin Pledge Rule?
For a client to take an intra-day trade or a leveraged trade in an account, he needs to have some margin before a broker allows him to take positions. These margins can be in the form of cash or stocks. Based on the margin available the broker allocates the trader limits under which he can trade.
Suppose if a client has Rs 10 lakh in his account he can be given a limit of Rs 30 lakh to trade, this limit changes from broker to broker. Now if the client had shares worth Rs 10 lakh pledged with the broker, a haircut would be given on the value of shares and the final amount would be considered for giving limit to the client.
If cash is the source of margin, there are no changes suggest by SEBI. But when the trader uses his or her shares for margin purpose the new rule becomes applicable.
Prior to the implementation of the new Stock Margin Pledge Rule, shares that a client held were pledged directly with the broker by transferring the shares to the broker’s pool account using the Power of Attorney (PoA) that the client is supposed to sign. The broker would then pledge these securities to the Clearing Corporation.
The PoA was a problem area that was exploited by some brokers and is the main reason behind the changing of rule by SEBI. Cases were reported that some brokers misused the PoA in transferring the client’s shares to meet the margin requirement of some other client or use the client’s share as collateral and borrow money for themselves.
The new Stock Pledge Rule puts an end to the PoA system and comes up with a new mechanism of pledging shares.
Under the new rules implemented by SEBI, the pledged shares will always remain in the client’s Demat account. The client would need to authorize a pledge request in the favour of his broker. Only if this pledge is approved by the depository, the broker can then pledge those shares with the clearing corporation.
How does a client benefit from the Stock Margin Pledge Rule
- The stocks that are held are margin will always remain in the client’s account.
- There is less to no chance of misusing the shares of the client by a broker.
- In the earlier system, since the shares pledged were in the broker’s account, some of them would not pass on the benefit of dividend and other corporate actions to the client, especially for those clients whose accounts were dormant or for those who did not have the knowledge of such corporate actions. In the new Stock Margin Pledge Rule benefit of all corporate actions will be accessible and visible to the client.
Since the new Stock Margin Pledge Rule is now implemented and is in play all new share pledges will be created only through this route. All brokers have been instructed to transfer the old pledges to the new system.
However, there have been some technical glitches in the implementation of the new pledging rule, the market regulator has given some relaxation in terms of the imposition of penalties for delay in the collection of margins. However, this is only a short term window and there is no going back to the old way of working.
The new Stock Margin Pledge Rule will bring in much-needed transparency and help fortify the trust between a client and his broker.
TradeSmart clients can pledge shares by following the below-given steps.
- Login to BOX
- At the left side, click on Margin Against Shares > Pledge > Pledge Shares
- In Pledge More section, enter the quantity to be pledge
- Click on Pledge Button at the right bottom corner.
After we receive your request, we shall upload your request to the CDSL. Once we upload the request, below are the important steps to be carried out by you.
- You shall receive an email/SMS from CDSL containing an URL
- Click on the link and enter your PAN and other required details
- Select the stocks you wish to give for pledging and generate OTP
- An OTP will be sent to the registered email/mobile and shall be valid for only 15 mins
- Enter OTP and submit. Now you’re done with the process
Once the process is completed, you shall get the collateral benefit on the next trading day.
POA (Power of Attorney) is Mandatory for Pledge
Please note, pledge request from BOX, will be accepted only if you have submitted a POA physical copy.
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As per the new mechanism of pledging, shared once pledged, they are not taken out from your demat account. They are just marked as lien (Pledge marking). This new mechanism discourages brokers to utilize pledged shares for other clients.
Are the pledge shares can be utilised by the brokers as a margin to other clients?