New margin, share pledging norms faulty, say traders

The new margin and share pledging norms sent market participants into a tizzy as brokers and traders alleged that the modified system was faulty and could not handle the trade traffic. Chaos reigned in the market on Wednesday as brokers said share pledges of clients for the purpose of margins were not being reflected in the systems, denying them the opportunity to trade.

The rules on share pledging were introduced on September 1 after Securities and Exchange Board of India (Sebi) rejected brokers' demand to postpone them. Until last month, investors wishing to use their idle shares to make other stock bets pledged them in favour of the brokers as collateral. Now, they have to pledge shares with the depositories -- Central Depository Services India (CDSL) or National Securities Depository (NSDL).

“Depositories’ systems did not reflect pledge and unpledged details on time,” said the CEO of one of the country’s largest brokerages. “There was chaos and confusion today because nobody had the answers.” ET could not reach depositories for comments but top officials of four brokerages confirmed the disruptions.

The new margin norms do not allow investors to initiate a trade without bringing in upfront money. They can do it by depositing cash or having their shares pledged. Brokers said the older share collaterals of several clients were removed and they were pledged afresh to comply with the new norms but these were not reflected in the systems.

“Clients had repledged the shares but they were not showing. We were at the receiving end of our clients because they were not getting the margin benefits,” said the CEO of another large brokerage firm.

Trading volumes on NSE's cash segment dipped to nearly Rs49,565 crore on September 2 from Rs61,788 on September 1 and Rs98,935 on August 31.

If brokers do not collect upfront margins from clients in the cash segment, they have to pay a penalty to the clearing corporation. Officials at brokerages said most clients are recovering the penalty amounts from their clients.

Brokers said many investors, who wanted to sell their pledged shares, were unable to unpledge them on Wednesday.

“It was a total mess on Wednesday,” said one of the two CEOs quoted above. “Even the back-office software used by brokers for clearing and settlement have not been updated. Invariably, the smaller clients have been at the receiving end, while we have used all our resources to service the most important clients.”