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Margin Trading Facility (MTF) helps investors buy stocks that they cannot afford by paying a marginal amount of the actual value. Until September 2020, an investor could indulge in marginal trading with cash only. However, it is now also possible to pledge shares as collateral.
Published on 24 April 2023
The Securities and Exchange Board of India (SEBI) has made it mandatory for investors to pledge the shares they buy under the margin trading facility. This pledge request has to be made before 9:00 pm on the date of the purchase. If the MTF pledge request is not placed before 9:00 pm on the trading day, the investor can no longer hold the position, and shares are squared-off. In this article, let us learn what MTF Pledge is, how it is different from Margin Pledge, its need, and the MTF Pledge process.
MTF Pledge is a mandatory practice imposed by SEBI. After buying shares under MTF, an investor must initiate the MTF Pledge process to continue holding the position. The timeline for pledging the equity shares purchased under MTF is before 9:00 pm on the order day. If the trader misses the timeline, it triggers squaring off of the shares on T+7 days. Your shares can also get squared off automatically on T+4 days if there is a margin shortfall.
Unlike Margin Pledge, where investors can pledge approved securities, including mutual funds, sovereign gold bonds, stocks, etc., MTF Pledge allows an investor to pledge approved equity shares only. Margin Pledge lets investors pledge securities whenever there is a need for additional margin. MTF Pledge requires pledging of shares before 9:00 pm on the purchase day.
When an investor wants to take a leveraged trade or an intra-day trade, he must have a margin for the broker to permit the trade. The margin can be in the form of stocks or cash. Depending on the margin available, the stockbroker provides the trader limits for executing the trade.
Let us understand this with the help of an example.
If a trader has ₹5 lakhs in the account, he can get a trading limit of ₹15 lakhs. The limit range varies from one broker to another. If the trader pledges shares worth ₹5 lakhs with the broker, the broker will determine the final client limit after giving a haircut on the value of the shares.
Also Read: What is Face Value of Share?
SEBI has not introduced any changes to cash margins. But, if the trader uses shares to generate a margin, MTF Pledge is mandatory.
Before the imposition of this rule, the shares that a client pledged were transferred to the broker’s pool account after getting a Power of Attorney (PoA) signed by the client. The broker then pledged the shares to the Clearing Corporation.
Some brokers misused the Power of Attorney. They transferred a client’s shares to create a margin limit for another client. As a result, the SEBI had to introduce changes to the mechanism. With MTF Pledge, the client continues to hold the position in the Demat account.
Using the centralised or national depository authorities, CDSL and NSDL, the client authorises a pledge request in favour of the broker. After the approval of the pledge request by the DP, the broker initiates the pledge to the Clearing Corporation to generate a margin limit.
This new mechanism adds transparency to the system of pledging shares. The client’s shares remain in the Demat account instead of being transferred to the broker’s account.
After you execute a trade under MTF, here’s what you need to do to complete the Pledge Request.
Margin Trading Facility can change the way you trade and earn from the stock market. And MTF Pledge brings in the much-needed transparency to foster a relationship of trust between the client and the broker. Remember to follow the MTF Pledge process within the set timeline to avoid squaring off of your shares and make the most of this unique facility.
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