Penalty for margin shortfall in derivative trading to begin from Tuesday

Brokers will start levying a penalty of 18-30 per cent on margin shortfalls, a move that is likely to hit retail investors and derivative trading volumes, a report by the HinduBusinessLine said.

Though the Securities and Exchange Board of India (Sebi) implemented the norms for tracking investors' margins on live basis in May last year, the penalty clause was delayed by one year to allow investors to adjust to the new margin norms and the industry to put in place the necessary infrastructure, the report added.

The trading volumes in the derivatives section have been declining since Sebi began tightening margin norms for investors and preventing brokers from misusing investors' funds in the wake of the Karvy episode.

Sebi has issued the norms to safeguard client interests from excessive trading and lowering broker’s risk. The market regulator wants clients to bring in margin funds before they place trades on the exchange platform. Brokers are required to do real-time allocation and report to exchanges and clearing corporations.

Narinder Wadhwa, National President of the Commodity Participants Association of India told the Hindu BusinessLine that the third phase of clients' funds' segregation and allocation of assets will have a short-term impact on volumes, but it will be beneficial for markets and its integrity in the long run.

We believe that it will also increase the capital requirements for brokers and, inadvertently, raise costs for investors and traders, he added.

In response to instances of brokers misusing clients’ collaterals, the regulator also issued a framework for the segregation and monitoring of collateral at the client level.

Such abuse was revealed in the aftermath of the Karvy Stock Broking scam, in which clients' shares were illegally pledged as collateral against loans. As a result, segregating of a client's collateral will protect it from being misused by trading or clearing members and pre-allocating funds will give clients control over leverage in the markets.

What is Karvy Broking scam?

Hyderabad-based Karvy Group flagship Karvy Stock Broking Limited (KSBL) pledged securities lying in its clients' demat accounts without their permission to raise funds from multiple banks and financial institutions. These funds were then diverted to other Karvy group companies.

According to a TOI report, preliminary estimates showed that KSBL pledged securities of over 95,000 clients and raised over Rs 2,300 crore through loans against shares  (LAS) from multiple lenders including HDFC bank, ICICI bank, IndusInd bank, Axis bank, Bajaj Finance, and Aditya Birla Finance.