How SEBI has exorcised market’s panic fall


A large set of market participants is uncomfortable as the market defies their logic and keeps rising. Thanks to easy global liquidity and low interest rates, domestic benchmarks have been rising continuously the last few days and scaling new peaks almost every day, never mind the fundamental value.

Experience suggests that whenever the markets have moved sharply and away from the fundamentals, they have crashed in excess of 30 per cent and struggled to regain strength for several months.

A lot of investors, especially those who missed the opportunity in March, are expecting a similar precipitous fall in the hope of entering the market. If you are one among them, you are going to be disappointed, largely thanks to market regulator SEBI’s recent moves on pledging and margins.

In September, SEBI did away with the need for execution of power of attorney to brokers by investors. Earlier, investors, who wanted to sell their holdings, either had to transfer their shares to the brokers’ demat account or give a power of attorney (POA) to the broker, who in turn would sell the shares to a clearing corporation and custodian.

However, the new rule discontinues this practice and the shares will continue to remain in the investor’s demat account. The investor needs to directly pledge his shares to the clearing corporation while selling.

No pooling of securities

Also, earlier, brokers would pool securities of clients, using one client’s holdings indirectly to provide margin to anothershort on collateral. SEBI has stopped this practice, too, and said no to pooled accounts of clients holdings.

The regulator also introduced upfront margin in the cash segment too from September. Under this framework, brokerages are required to collect from clients a system-generated margin upfront, which works out to about 20 per cent of the deal value.

For instance, if a client wants to buy Reliance Industries shares worth ₹1 lakh, then s/he must have ₹20,000 in her/his trading account while the balance has to be paid within the trading cycle of T+2 days. Similarly, even for selling ₹1 lakh worth of Reliance shares, he/she is required to have an upfront margin of ₹20,000 in the trading account, failing which penalties will be levied.

No credit benefits on same day

Further, selling clients will not get any credit benefit on the same day and the entire amount will accrue to their account once the settlement is completed, that is, in T+2 working days. That also means that one cannot just pay margin by netting their buying and selling on the same day. Now, each transaction has to bring in margin money. Apart from these, SEBI had also introduced peak margin from December 1, 2020, in a phased manner.

These steps are significant as earlier stock markets tended to fall dramatically whenever panic gripped on two counts: one, margin pressure, and the other, selling by brokers from pooled accounts, impacting a whole lot of scrips, which had nothing to do with a particular trading happening in a brokerage house.

The recent smart moves by SEBI address both the issues and ensure that the market doesn’t panic and fall vertically. On the one hand, the SEBI’s move will check Karvy Broking type of misuse by brokers, and, on the other, will also ensure an orderly market when volatility rises due to unforseen events.



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