Margin Funding: Sebi, RBI look at rule loophole

NBFCs being used for higher leverage than otherwise allowed; expert panels ask both regulators to align rules

A committee advising the stock market regulator on systemic issues has recommended it address a disconnect in regulations by which investors are able to leverage their trades many times over the amount the Securities and Exchange Board of India (Sebi) allows.

Sebi regulations do not allow brokers to provide their clients exposure which is more than twice their given capital. However, most large brokers have non-banking finance company (NBFC) arms through which they provide up to five times exposure. This falls into a regulatory grey area, since NBFCs are technically under the Reserve Bank of India (RBI).

The 19-member Secondary Market Advisory Committee discussed the issue recently, according to two people familiar with the matter. And, has given a recommendation on this. “There should be some parity between the two. We have advised Sebi accordingly,” said one of the sources.

LEVERAGE LOOPHOLE

• Sebi allows 50% margin
• Brokers set up NBFCs to offer higher leverage
• It’s a regulatory grey area, as NBFCs are under RBI
• Sebi advisory panel asks it to address issue
• Sebi writes to RBI on the matter

“Sebi has taken cognizance. It has written to RBI to discuss how the matter can be addressed,” said the second source.  

Emails sent to Sebi and RBI did not elicit a reply.

Under the Sebi rules, if a client has Rs 200, a broker can only allow him to trade worth Rs 400. However, this exposure can go up to Rs 1,000 if done through the NBFC arm.

Karthik Srinivasan, co-head for financial sector ratings at ICRA, said any tightening of norms might adversely impact cash market volumes.

“While Sebi allows brokers to provide margin funding, the customer has to provide an initial margin of 50 per cent. RBI has no such specific stipulations for capital market exposures of NBFCs. If this grey area was to be addressed by the regulators, then there could be an adverse impact of 10-20 per cent on cash market volumes, since most of the funding is for this segment,” he said.

Adding: “In such a case, the profitability for brokerages might be affected because of reduced trading volumes. The impact on NBFC arms will depend on the extent of their non-capital market-related lending operations. The total capital market-related loan book of NBFCs is estimated to be around Rs 30,000 crore, including activities such as promoter lending and loans against securities, in addition to margin financing.”

Others say falling equity market participation has also hit the amount of lending actually done for margin funding. “Capital market activity has been muted in recent times and lending opportunities have been limited,” said Sameer Kamath, chief financial officer at Motilal Oswal Financial Services.

Those watching the sector peg the amount spent on margin funding to between Rs 5,000 crore and Rs 8,000 crore.

RBI’s own ‘Report of the working group on issues and concerns in the NBFC sector’ had noted the need to align regulations with Sebi rules.

“NBFCs may be subject to regulations similar to banks while lending to stock brokers and merchant banks and similar to stock brokers, as specified by Sebi while undertaking margin financing,” it had stated when the report was released.

Emails sent to Sebi and the RBI did not receive a reply.

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