Acting on the request from market participants for review of margin trading facility (MTF) to enable greater participation, the capital market regulator, Securities and Exchange Board of India (SEBI) has issued a circular specifying the comprehensive review of MTF framework including disclosure norms, leverage & exposure limits and eligibility requirements for stock brokers to provide it to clients.
As per the circular, the corporate brokers with a net worth of at least Rs 3 crore will be eligible to offer MTF to their clients and the net worth for the purpose of MTF shall be as specified in SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. Besides, the stock brokers would need to submit a half-yearly certificate from an auditor confirming the net worth to the stock exchange. The SEBI further noted that at any point of time, the total indebtedness of a stock broker shall not exceed 5 times of its net worth.
The circular though mentioned that the brokers may use their own funds or borrow from scheduled commercial banks or Non Banking Financial Companies (NBFCs) regulated by Reserve Bank of India for providing MTF, while they are not allowed to borrow funds from any other source. Also, the total exposure of the broker towards MTF should not exceed the borrowed funds and 50 per cent of his net worth. Brokers have to ensure that the exposure to a single client does not exceed 10 per cent of its "total exposure". Besides, exposure towards stocks purchased under MTF and collateral kept in the form of stocks need to be well diversified.
Sebi has further guided that in order to avail margin trading facility, initial margin required for Group I stocks available for trading in the F & O Segment will be VaR in addition to three times of applicable ELM, while for Group I stocks other than F&O stocks, shall be the VaR in addition to five times of applicable ELM. The initial margin payable by the client to the Stock Broker shall be in the form of cash, cash equivalent or Group I equity shares, with appropriate hair cut as specified in SEBI circular dated December 16, 2016.