Sebi has issued a comprehensive framework on margin trading facility (MTF) including disclosure norms and eligibility requirements for brokers to provide it to clients.
The facility is executed with borrowed funds or securities that enable investors to take exposure in the market over and above their resources.
The markets regulator said in a circular that only corporate brokers with net worth of at least Rs 3 crore are eligible for providing MTF to their clients. The brokers would have to submit to the exchange a half-yearly certificate from an auditor confirming the net worth.
For providing MTF, a broker may use his own funds or borrow from scheduled commercial banks or NBFCs regulated by Reserve Bank of India. A broker is not allowed to borrow funds from any other source.
Further, it said, brokers would not use the funds of any client for providing the facility to another client, even if the same is authorised by the first client.
In addition, brokers have to disclose to the stock exchange the details on gross exposure including name of the clients and the PAN, category of holding (promoter-non- promoter), name of the scrips (Collateral and funded) and if they have borrowed funds for the facility, name of the lenders and amount borrowed.
At any point of time, the total indebtedness of a broker should not exceed five times of its net worth.
The "total exposure" of the broker towards MTF should not exceed the borrowed funds and 50 per cent of his net worth. Brokers have to ensure that the exposure to a single client does not exceed 10 per cent of the "total exposure" of the broker.
Besides, exposure towards stocks purchased under MTF and collateral kept in the form of stocks need to be well diversified.
MTF is available for Group 1 securities and those that meet the conditions for inclusion in the derivatives segment of the stock exchanges.
The Securities and Exchange Board of India (Sebi) said that initial margin should be based on Value at Risk (VaR) plus three times of applicable Extreme Loss Margin (ELM) for Group I stocks in the F&O Segment
Besides, for Group I stocks other than F&O stocks, the initial margin would VaR in addition to five times of applicable ELM.
The initial margin, payable by the client to the broker, should be in the form of cash or cash equivalent.
"The stocks deposited as collateral with the stock broker for availing margin trading facility (collaterals) and the stocks purchased under the margin trading facility (funded stocks) shall be identifiable separately and no co-mingling shall be permitted for the purpose of computing funding amount," Sebi said.
The exchanges will have to frame a 'Rights and Obligations' document for brokers and clients on MTF. This would be mandatory and binding on the broker as well as and the clients.
Sebi has asked brokers to ensure maintenance of the margin when it is being availed of by the client. In case of short fall, brokers would have to make necessary margin calls.
It has asked brokers to list out conditions in which the securities may be liquidated and such situations would be included in the 'Rights and Obligations Document'. However, the broker would not liquidate client's securities in any situation other than the conditions stipulated.
Brokers will have to maintain separate client-wise ledgers for funds and securities of clients availing margin trading facility.
"Any disputes arising between the client and the stock broker in connection with the margin trading facility shall have the same treatment as normal trades and should be covered under the investor grievance redressal mechanism, arbitration mechanism of the stock exchange," Sebi said.