The Securities and Exchange Board of India (Sebi) has proposed the introduction of a margin trading and securities borrowing and lending scheme in stock markets from February 1 2004.
Under the rules of margin trading, investors will pay a 50% margin of the share value, while brokers will finance the balance. Additionally, investors will have to maintain a margin of 40% against a possible fall in share value with a provision that, in case the margin should fall below 30%, the broker could be entitled to sell the security in the market.
Eligible brokers can use their own fund or borrow from banks, non-banking financial companies and other qualified institutions registered with the Reserve Bank of India. Further, there is no restriction on the rate of interest that a broker could charge on funds lent under margin trading.
To keep a check on speculative trading, Sebi has proposed that only corporate brokers and qualified institutions with a minimum net worth of Rs30 million be permitted to service margin trading. They could invest up to five times their net worth but investments would be restricted to stocks in Group-1 of Sebi's risk management system.
Sebi has also stipulated strict disclosure requirements for margin trading. Brokers will now be required to disclose their position regarding clients, scrips and lenders to the stock exchanges on a daily basis. The stock exchange will then disclose details of scrip margin financing to the public.
Under the securities borrowing and lending scheme, an investor who has sold shares without holding securities can now borrow securities from another and deliver the securities to the buyer. The clearing corporations of the stock exchanges would be the agency for lending or borrowing securities.
These measures will increase liquidity and open a new stream of revenue for brokers, in line with international financial markets.
By Shardul Thacker