The Finance Ministry may soon have a decision to make, whether to encourage retail investors participation in the stock market through direct trading or to discourage them as seems to be the case with recent diktats on margins and intra day trading by the regulator, Securities and Exchange Board of India (SEBI) which have introduced a sense of unease among the broking community and retail investors.
Stock brokers have petitioned the Finance Ministry and SEBI on circulars which if implemented is feared that it will have the effect of reducing trading volumes drastically and wipe out number of brokers.
The SEBI circulars coincide with an important new trend in the form of an unplanned and sudden entry of millions of new retail investors in the stock markets during the lockdown and Covid 19 phase. Many of them have either become unemployed or have reduced income and have started home while they were sitting at home during the lockdown and normal economic activity was curtailed.
The circulars come at the fag end of the extension given to SEBI Chairman Ajay Tyagi. He got a six month extension in his tenure which was to end on March 1. It is not known whether he will get a further extension after August. The Indian Administrative Service (IAS) officer of Himachal Pradesh cadre has served a three-year tenure following which another six months extension was given by the government.
There are growing concerns among broking and retail trading community over the SEBI circular to ban intraday leverage.
The revised guidelines will severely limit intraday trading which contributes almost 90 percent of the volume in exchange and has existed in India for decades. The move will diminish the liquidity, volumes and financial opportunities to thousands of people to a great extent, brokers said.
Financial market is the only sector that has been able to function since the lockdown began in India and provided numerous opportunities to regular people facing job losses survive in these difficult times," said Sahil Balani, Head- Research & Derivatives, Triventure Advisory Pvt Ltd.
It is also estimated that the new circular will have a great impact on the derivatives markets as it will suck out the liquidity from the system, volumes will dry up to a great extent and will impact the livelihood of many retail traders.
"Instead of enforcing a ban on intraday leverage, it should be left to the brokers discretion with minimum controls at place. Penalty cannot be the way of doing business in a country like India where there is so less participation in capital markets," said Balani.
The Securities and Exchange Board of India (SEBI) released its latest circular on July 20, 2020, aimed at banning the intraday leverage in a phased manner by December 1, 2020. According to the circular, traders and investors will now have to maintain upfront margin in their account to receive leverage from brokers.
Brokers say that with the country suffering from pandemic and the fate of making a livelihood is at stake, many people have recently gathered hope from intraday trading and implementation of this circular will make it difficult for the whole trading community to explore any such opportunity. During this pandemic, many individuals including housewives are turning towards intraday trading for their livelihoods.
The other contentious circular pertains to the pledge/re-pledge process where SEBI has put in strict controls after the Karvy scam, where it was found that clients' shares were transferred by the broker to its account without the knowledge of the client.
To prevent this misuse, SEBI had banned the title transfer collateral system and proposed to replace it with a pledge/re-pledge process which would be transparent so that an investor knows the exact status of his shares. This new mechanism of pledge/re-pledge was to come into effect from August 1.
In addition, the stock exchanges following SEBI directions have mandated that the proceeds of the sale of shares cannot be used to purchase stocks till the money is credited in the client's account.
All of these are having the effect of drying up liquidity for retail investors and making it difficult for brokers to sustain.
The Association of National Exchanges Members of India (ANMI) has written to Finance Ministry and SEBI on the issue of pledge of shares.
ANMI has received numerous concerns from members with respect to pledge mechanism for funded stocks. "In view of the concerns of the broking industry and software vendors, ANMI submits to your good offices to consider granting extension of implementation of SEBI Circular for next two months and allow the existing system of crediting the funded stock to earmarked funded stock DP account," ANMI said.
ANMI has also warned against a breakdown leading to chaos. "The transition from the old regime to the proposed pledge repledge process in such a hurried manner is fraught with great risks and will completely break down the day to day processes and operations of all market participants leading to unmanageable chaos and total breakdown. How can all the stakeholders in the entire eco system manage to transition to the new processes in such a hurried manner," ANMI said.
"Moreover, our earlier submissions on the glitches in the methodology of penalising clients for cash margin with respect to sale of shares, BTST trades, the early pay in timelines, etc; are still open and not yet addressed. We once again reiterate our earlier plea for the simultaneous running of the old and new proposed processes for the next two months to ensure smooth transition which will be to the benefit of all," ANMI said.