Explained: Why brokers are protesting SEBI’s new margin, share pledge norms

The new rules mandate the buyer or seller of securities to have 20 percent upfront margin in their account before entering into the transaction.

Also, the trader cannot use the realized profit from an intraday trade to enter into another trade.

For instance, if a trader buys RIL shares worth Rs 10 lakh and decides to sell it the same day for the small profit, he cannot adjust the proceeds due from that sale transaction for a fresh buy trade in some other stock. Only when the amount is credited to the trader's account two days later can he use it as margin for other transactions. This rule means that for every new intra-day trade, the trader will have to put up fresh margins. This will limit his ability to do multiple trades through the day. This is bad news for the broker as well since the broker earns his commission on every trade that his customer does.

Another aspect of the new rules is pledging shares for margin requirements. Instead of cash, a broker's clients can pledge shares worth an equivalent amount. Say a client wanted to do a trade worth Rs 1 crore. The Rs 20 lakh margin he has to put up with the broker can be in the form of shares as well.

Before the new regulations came into force, the client would give his broker Power of Attorney (PoA) over his or her demat account. Using the PoA, the broker would transfer the shares from the client demat account to his own, and then further pledge the shares with the clearing corporation to meet the margin requirements.

Many brokerages were found to be misusing the PoA. Sometimes one client's shares would be used to meet the margin requirement of some other client. In some cases, the broker would borrow money using the client's shares as collateral, without informing the client.

Under the new rules, the pledged shares will continue to remain in the client’s demat account. The client needs to authorize a pledge request in his broker's favor, and once that is approved by the depository, the broker can then pledge those shares with the clearing corporation.

First, the client has to generate a request to pledge the shares using the broker’s terminal. He will receive an authentication request from the depository, CDSL or NSDL, via SMS or email. The client should then follow the link in the email which will take him to the depository page where he has to verify all the details. Then, he will get a One Time Password (OTP) which he has to enter for final approval.

If approved successfully, the securities will be pledged with the broker who will in turn place a repledge request with the clearing corporation.

Large traders do multiple trades in a single day. The process for pledging of shares has suddenly got longer. Also, when a trader squares off his trade, the pledge on the shares put up as margin will have to be released and the information has to be conveyed to the depository. If there is a delay, the trader will not be able to pledge the shares for the next trade. This restricts the trader's ability to do multiple trades and hurts the broker's earnings as well.