Share trading has grown significantly in recent years, particularly in 2020 after the pandemic forced most people to stay home. To fill in the various cracks and strengthen the stock market’s regulatory framework, the capital markets regulator (SEBI) comes out with multiple regulations. The Securities and Exchange Board of India (SEBI) regularly updates new guidelines and producers to follow when trading on public segments. Since circulars are put out almost every month, it is essential to be mindful of the latest rules laid out by SEBI. Here’s how some of the changes put into effect last year will impact intraday traders.
When it comes to the delivery of shares, intraday traders will primarily not be affected by the recent circular. For bank-owned brokers, where margin money or stocks from the linked bank account are blocked by one’s broker when one places their trade, the latest mandate will barely change how they operate. Bank-owned brokers tend to block all of the money when the trade is put if there is a buy-transaction. In case of a sale transaction, the stocks are blocked by the broker.
With current SEBI regulations, brokers will not merely be able to block funds but also debit them at the time at which they are carrying out their trade. One can stop either the entire sum with which they are trading, or 20% of the minimum stipulated amount, otherwise known as the trade amount. Let’s consider an example. Suppose you have chosen to purchase shares from Asian Paints that are worth ₹100. Before the recent circular, the entire ₹100 you are paying would have been debited right on the day after (T+1), enabling the broker to pay on T+2. With the recent mandate, ₹20 will be debited on the day of the trade itself.
Alternatively, suppose you choose to sell Asian Paints shares that are worth ₹100. In that case, you may deposit a cash margin that has 20% of the value of the securities in advance, or you may have to transfer all of the securities to your broker’s account on the same day as your Demat account, instead of getting to move them on the following day. The consequence of this change is that you will see a minor loss of interest on the money currently parked in the bank account linked to your broker.
Some people are referring to this shift as one from postpaid to prepaid. Where do ‘postpaid’ and ‘prepaid’ factor in? The context for this statement is that most online brokers were taking cash or securities upfront of the trading day. Offline brokers are known to take customers’ stocks and their money on a post-paid basis, wherein funds are transferred on the day after the trade has been placed. Hence, offline brokerages are much more likely to be impacted by the recent circular as they are highly dependent upon the customer-broker relationship.
Pledging of Shares
Another way in which SEBI mandates will impact intraday traders is when it comes to the pledging of shares. With the latest rules, if an investor opts to pledge shares for marginal requirements, the shares will not move from the investor’s Demat account, but instead, a lien will be created that will favor the broker. Earlier, the broker would transfer shares pledged in its demat account using PoA or a power of attorney (PoA). Once a lien is created with the latest rules, the broker will pledge one’s holdings to clearing corporations for marginal requirements.
In fact, the broker will be required to take the investors’ permission by generating a one-time-password (OTP) before pledging authorization of shares. The OPT serves as an additional layer of security between the broker and the investor. There are more benefits afforded to intraday traders too. Benefits from corporate actions such as right and dividend issues are also now directly credited to the accounts of customers, which would earlier come into the broker’s Demat account. Hence, the newest regulations are meant to benefit investors.
Intraday Trading Strategies
The profit from your intraday shares will not be able to be used for trading further on the same day. Such gains are reflected in t+2 days. For instance, an intraday trade may garner a profit for you on Monday. This profit can now only be used on Wednesday for further trade activities. Due to this new regulation’s nature, traders will have to switch up their intraday trading strategies to accommodate the new mandate. Particularly for those intraday traders who wish to carry forward a bulk of their intraday trades, the requirement for margin money will grow since they will not – partially or fully – fund it with the profits they make from intraday trading earlier in the same day.
Unless traders choose to fulfill the minimum marginal money requirement, they will not leverage their trades if they are required to do so. Before new regulations coming into effect, there are also no standard limitations concerning the amount of leverage a broker could provide to his clients. Brokers even offered leverage upto 100% of the marginal trading money required to execute intraday trading strategies. This practice will now have to be curbed since everybody must collect at least 20% of their trade’s value in the form of margin upfront.
The Bottom Line
Although the stop of margin trading may seem painful in the near term, less leverage will equal less risk in the long run. The broader benefit is afforded to both the broking community as well as investors. This is seen by investors having to take on fewer loans and brokers having to face a smaller risk of default.