A Guide on Margin Requirements, Pledge and Re-pledge – The Process and How It Works

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A Guide on Margin Requirements, Pledge and Re-pledge – The Process and How It Works

June 09, 2021
A Guide on Margin Requirements, Pledge and Re-pledge – The Process and How It Works

Over the last few days, trading circles have been agog with conversation about SEBI’s new margin rules. What are these rules? And how will they affect you as an investor?

We will attempt to answer these questions in this article.

Caveat: Espresso does not currently offer the share-pledging facility. We shall have it available soon.

From Sept 1, 2020, the Securities and Exchange Board of India (SEBI) has introduced changes to the margin system for the Cash segment.

What is "margin"?

Margin is the minimum amount of money clients must have in their brokerage account to make any trade. For example, let’s say you wish to buy 1,000 shares of company A, which is trading at Rs 50. The total value of your trade works out to Rs 50,000.

The Exchanges have set margin requirements for each stock depending on many factors, including volatility and liquidity. If the margin requirement for stock A is 20%, you must have Rs 10,000 in your account to make the trade.

This is known as a cash margin.

The alternative to having cash margin is to put up margin in the form of shares. Instead of having Rs 10,000 in your brokerage account, you could pledge shares worth Rs 10,000 after the haircut.

Changes to pledging rules

Earlier, if you wanted to use your shares for margin, you had to transfer them to the broker’s margin account or maintain in the PoA-based DP account of clients. This usually happened automatically through a Power of Attorney. To prevent misuse, SEBI has changed the rules. Instead of transferring the shares to your broker’s margin account, you can now pledge the shares in favour of your broker through an OTP authentication process. The shares will remain in your demat account, but they will be locked. SEBI has also disallowed PoA-based pledging of shares.

What are the other changes that will impact traders?

  • Margin FirstEarlier, investors had to meet their margin requirement by the end of the day. Under the new rules, you must maintain the margin upfront.
  • Sale Proceeds: If your broker does not have an early pay-in system, you will not be able to use the money from a sale of shares immediately as margin. Many traders sell shares of one company and buy shares of another company. They use the value of shares sold as a margin to take a new position. To enable this, your broker must make an early pay-in to the Exchange after debiting the shares from the client’s PoA-based DP account.
  • Intraday Profits: One of the major changes is in the use of your day trading profits for leverage. Earlier, you could use the profits you generate from Intraday trading as margin. In the new regimen, you will have to wait till the money is credited into your account (which is 2 days later) to use it as margin.

The new rules by SEBI are intended to protect the interests of investors and traders.

Important Note

Espresso does not currently offer the share-pledging facility but we shall have it available soon.

R. Kalyanaraman
by R. Kalyanaraman

Chief Executive Officer

I am a sales guy at heart with utmost willingness to listen to people – customers, employees, competitors et al. Nothing gets me a bigger adrenaline rush than an interesting conversation with my customer!