New Sebi rules may change the way you trade stocks

After the Karvy fiasco last year, where the broker used loopholes in the system to use investor money for its own benefit, the capital markets regulator drew up various regulations to plug the cracks and strengthen the regulatory framework so that such events can be avoided in the future. These new regulations concern both equity and derivative markets.

The new regulations are favorable to investors because they reduce risk and provide more transparency. “The new mechanism empowers investors and brings more transparency to the brokerage ecosystem,” said B. Gopkumar, Managing Director and CEO of Axis Securities.

Equity trading activity has increased significantly in recent times, especially after the onset of the covid-19 crisis. But you should be aware of the new rules issued by the Securities and Exchange Board of India (Sebi) regarding stock transactions, which will be implemented between September 1 and December 1 in a phased manner.

After the Karvy fiasco last year, where the broker used loopholes in the system to use investor money for its own benefit, the capital markets regulator drew up various regulations to plug the cracks and strengthen the regulatory framework so that such events can be avoided in the future. These new regulations concern both equity and derivative markets.

The new regulations are favorable to investors because they reduce risk and provide more transparency. “The new mechanism empowers investors and brings more transparency to the brokerage ecosystem,” said B. Gopkumar, Managing Director and CEO of Axis Securities.

Here’s how some of the changes that came into effect on September 1 will affect the different ways you trade.

Delivery of shares

In this case, your trading is largely unaffected. This is especially true for brokers owned by a bank where the margin money or the shares of the linked bank account are “blocked” by the broker at the time of the transaction. In the event of a purchase transaction, brokers belonging to the bank usually block the entire transaction. money owed at the time of the transaction Stocks are blocked by the broker in the event of a sell transaction.

With the current regulations, brokers will not only block funds, but also debit them at the time of trading. This can be either 20% of the transaction amount (the stipulated minimum amount) or the entire amount. “For example, if you buy shares of Asian Paints worth ??100. Previously, the whole ??100 would be debited the next day (T + 1) to allow the broker to pay in T + 2. Now ??20 will be debited on the same day, ”said Deepak Jasani, head of retail research at HDFC Securities. “If you sell Asian paintings worth ??100, either you deposit a cash margin of 20% of the value (of the securities) in advance or transfer all the securities in advance to the broker’s account on the same day from your demat account, instead of the next day ” , he added.

This will result in a slight loss of interest on the money parked in your bank.

Rajesh Baheti, director of the Association of National Exchanges Members of India (ANMI), called it “a move from postpaid to prepaid”. the nature of their business means that they don’t know the customer well. This will have a bigger impact on offline brokers as they were heavily reliant on customer relationship and used to take cash and stocks, on a post-paid basis, the day after the trade, “he added.

Intraday trading

You will no longer be able to use profits from intraday trades for other trades on the same day. These benefits are reflected in T + 2 days. “For example, trading profit from an intraday transaction on Monday can only be used on Wednesday for other trading activities,” said Nithin Kamath, CEO of Zerodha, a discount brokerage firm.

For investors who want to do a large portion of intraday trading, the cash margin requirement will increase as they will not be able to fund it, in part or in whole, with intraday profits made earlier in the same day. Unless they meet the minimum margin requirement, they would not be able to benefit from leverage, if necessary. Before the new regulations came into effect, there were no standard limits on the amount of leverage over the margin requirement that a broker could provide to its clients. The brokers even provided leverage of up to 100% of the monetary margin needed for intraday and other trades.

“Many brokers provided leverage or a margin funding facility, allowing clients to buy without any margin requirement. The brokerage firms gained a percentage value of the trade in this arrangement. But this practice will now have to stop because it is mandatory for everyone to collect at least 20% of the value of the trade as a margin up front, Kamath said.

While in the short term it could be painful, in the long term less leverage will equal lower risk and also protect the interests of the brokerage community and investors, Kamath said. As investors take out fewer loans, brokers will face less risk of default.

Pledge of shares

In the event that an investor promises shares for a margin requirement, the shares will not be transferred from the investor’s mat account, but a lien will be created in favor of the broker. Previously, the pledged shares were transferred by the broker to their demat account using a power of attorney (PoA) and were sometimes used by the broker as happened in by Karvy Case.

Once the lien is created, the broker will in turn pledge the holding to clearing companies for margin requirements. The broker will need to obtain the investor’s permission via a one-time password (OTP) based method before doing so. “This provides additional security to customers through the additional measure of OTP authentication for pledge authorization,” said Gopkumar.

There are also other advantages. “In addition, profits from corporate actions, such as dividend and rights issues, are now directly credited to clients’ accounts that previously came from the broker’s mat account,” Gopkumar said.

The new regulations will certainly benefit investors. Consult your broker to fully understand the changes.

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