Occur August 2020, the system of investing by use of shares as collateral is going to see a massive change. Buyers wanting to just take exposure by applying their demat holdings will now have to pledge their holdings in favour of the broker as a result of which they trade as against the current system in which the investor’s shares were being physically transferred to the broker’s collateral account from the investor’s demat account.
The mechanism which was to be successful from June 1 as per unique timeline now stands prolonged to August 1 for the reason that of the pandemic.
Allow us go as a result of the fundamental principles as to what was the present system and how particularly the new system will do the job.
What is the existing system?
At this time, in circumstance an investor wishes to trade in the capital market, he/she can do so possibly by transferring funds or by transfer of demat holdings to collateral/margin necessities to build positions. We will target on the option of transfer of demat holdings, as that is the issue subject. This takes place via the use of a power of attorney (POA) supplied to the broker on the demat account to be certain the trader does not will need not give an instruction slip to transfer the holdings each and every time, and in its place the broker does so on behalf of the investor, and this delivers operational ease.
The broker, in change, utilises the investor’s collaterals by pledging the exact to the clearing users/clearing corporations (CMs/CCs) to get limits/margins for alone to fulfil the investor’s margin obligation. The latest system has been in spot for nearly two decades.
How would new mechanism do the job?
In the proposed system, trader holdings will not get physically transferred to the broker’s collateral account, in its place it will only develop a lien in favour of the broker as a result of which the trader can trade/make positions. This leg is referred as margin pledge. The broker, in flip, will get limits and further pledge the holdings in favour of CM/CC by way of a system termed margin re-pledge. The trader will be ready to see the position in the demat holding, as to how much is pledged and how a great deal in transform is re-pledged by the broker.
To generate the pledge, the investor could initiate a request on his/her personal or could confirm the ask for initiated by the broker as a result of use of an OTP (just one time password). The new approach will assist resolve the key problems being confronted beneath the current system, whereby the only use the broker can make is to re-pledge the pledged shares, and not any place else. Next, the CM/CC will give limits to the broker only to the extent of investor’s margin requirement irrespective of the value of shares re-pledged by the broker. Aside from this, transparency in the new system will give assurance to traders with regard to their holdings staying risk-free. Also after the shift to new mechanism, brokers would be mandated to launch all the shares lying in their current collateral accounts to the demat accounts of respective investors and close their collateral accounts and take shares only by way of the new mechanism.
Difficulties in the new procedure
Numerous investors may not have up-to-date their hottest cellular cellular phone quantities/ email IDs with their depositories’ databases, which will make it tricky to get the OTP. Supplied the lockdown problem, updating the exact same will be a obstacle in itself. Also this will also require a expertise transfer to investors to successfully undertake the OTP society, as this will be applicable to even the outdated technology buyers, who may perhaps not be that tech-savvy.
Aside from the difficulties at the investor’s close, depositories also need to have to be geared up to put the units in spot to assure that the element can be designed accessible true-time by the use of API. If the pledge recommendations are processed with any time delay, it may possibly conclude up in buyers not finding the limits on a actual-time basis to trade/produce positions and, thereby, conclude up executing trades at a different rate altogether.
Immediately after the implementation of this approach by the depositories, brokers would require to change their back office and investing platforms to adopt the new mechanism and make sure that traders can switch in excess of to the new system seamlessly.
To summarise, the new framework would bring a lot of transparency in phrases of handling the securities and shall undoubtedly improve self-assurance and consolation at investors’ conclusion. Nonetheless, this will increase the operational perform at the client’s close to transfer the shares marking by OTP for buying and selling. Traders would be necessary to understand to use the new methodology underneath the OTP framework.
(Anupam Agal is Head of Operations at Motilal Oswal Monetary Companies. Views are his have)