Explained: SEBI’s new margin rules and what all the fuss is

The new peak margin rules unveiled by capital markets regulator the Securities and Exchange Board of India (SEBI) have caused much consternation among not just retail investors but also stock brokers, several of whom have voiced their concerns publicly. Even as these new rules kicked in on Wednesday, investors took to Twitter in anger, targeting the market regulator and alleging that it was against their interests. 

So, what exactly is margin?

Margin is essentially a facility that traders use to buy shares they cannot yet afford. They basically pay a part of the money to buy those shares with a marginal amount of the total value. The remainder of the money has to be paid in two days’ time. 

What do these new SEBI rules say? 

The new rules essentially apply to the futures and options (F&O) segment of the stock market and to intraday traders. They stipulate that the traders punting on the F&O segment or doing intraday trades will need to have 100% of the margin money in the linked bank accounts, to be able to trade—buy or sell shares—as against a minimum 75% requirement till the end of August. 

The margin rules apply both to buying and selling of shares you may hold as a trader. This will require both buyers and sellers to keep extra cash aside or pledge shares of equivalent amounts, for their trades to go through. 
The actual value of the 100% margin requirement though is not the same for every script. It is based on what is called the ‘value at risk’ (VaR) margin. 

The VaR is different for shares of bigger companies, as compared to those for smaller ones or penny stocks, for which it is significantly higher. 

Also, the ‘Buy Today-Sell Tomorrow’ (BTST) facility has been closed. This means you can only sell a share after you have received its delivery, two days after closing the trade, not the next day, even before you have received it in your demat account. Moreover, for the cash segment, funds from a sale cannot be used the same day, but only on the next day. 

But were these SEBI rules not introduced a year back?

Yes, these rules around peak margins were first introduced a year back. Since then, SEBI has been ratcheting up the margin thresholds in a phased manner. It had first mandated traders to keep 25% of the margin money between December 2020 and February 2021. This was upped to 50% between March and May this year, and then to 75% from June to August. Now, the limit has been raised to 100%. So, these rules have not hit the market out of the blue and were expected to be enforced. 

Then, what is the hullabaloo over the new SEBI rules really all about? 

The new rules will require traders and brokers to keep more margin money aside to punt on intraday and F&O trades they consider lucrative. Moreover, if they fall below the stipulated thresholds during the trading day, they will be penalized. These changes have them up in arms. 

What is SEBI’s rationale behind the move?

Simply put, SEBI wants to lower the leverage being taken by traders while betting on shares, thereby lowering their risk.