New Exchange Rules for Investors


3 min read
New Exchange Rules for Investors

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New exchange rule for investors which can possibly be applicable from Sept 01, 2020

There is one big issue that will set the industry back by a couple of decades. According to the FAQs, you cannot use the proceeds from selling your stock holdings to buy other stocks for 2 days from when you sell them. As per this rule, retail investors will not be able to buy stocks with the cash generated after selling stocks on the same day.

Settlement of stocks in India takes 2 days, which means that if you buy a stock, you’ll get it in your demat account after T+2 days. Similarly when you sell a stock, the credit from selling the shares reaches your account on T+2 days (This is T+1 for all F&O positions).  

What has been happening: If you are holding any stock in your demat and want to sell it today (Say worth 10,000 Rs.) so you can buy another stock today only worth 10,000 Rs. without adding extra funds.

New Rules: If you are holding any stock in your demat and want to sell it today (Say worth 10,000 Rs.) so you can't buy another stock today (worth Rs. 10,000 Rs.) because you get the credit after T+2 days. If you wish to buy any stock today then you need to add funds.

If you own one stock and would like to replace it with another, it's going to take you two days to do the replacement.

You would have to pay a margin for the selling and the buying, in normal circumstances. So, If you hold Rs 1 lakh in your demat and you are selling a stock with 22% margin then a margin requirement of Rs 22,000 is required to even sell it. While this might seem weird, the reason for this is that Exchanges and Depositories (demat accounts where you hold stock) are different systems. When you place a sell order on the exchange, there is no way for the exchange to know if you actually hold the stock in your demat account or not. So exchanges will require an upfront margin even for the sell trade.

So as per new rules, you are suppose to trade like a Mutual Fund now. when a mutual fund or PMS sells a stock, it has to wait for two days before the cash can be used to buy another stock. (Additionally, a mutual fund or PMS cannot trade intraday in stocks – that is, it cannot buy or sell unless it is for delivery, but this restriction hasn’t been applied on retail traders)

If you are using discount brokers like Upstox then this margin concept will not be applicable for you. Let me tell you how:

One workaround for brokers like Upstox who collect full money upfront for equity delivery trades is that, on T day, even though they debit 100% of the money from your account upfront, they report only margin amount to the exchange. The next day to sell, there will be sufficient margin amount to allow you to sell.

So for example, if you had Rs 1 lakh with which you bought Stock 'A' worth Rs. 1L with 22% margin, they block entire Rs. 1L and report Rs 22,000 as margin on T day. On T+1 day, to sell Rs 1 lakh of Stock 'B' with 25% margin, they will report Rs 25,000 from the remaining Rs 78,000 in your account as margin available. What this means is that they can allow BTST trades (if you have no other money in your account) on stocks where margin is less than 50% .

Since the top 1500 stocks have margin less than 50%, this also wouldn’t be a big deal for new generation discount brokers who collect full money for delivery trades when taking the trade.

Sometimes you have a futures or options position that goes against you, and you need to give more margins or pay cash. This currently can be resolved by just selling some shares, which will free up the cash. However, going forward, selling shares won’t work – you’ll simply have to bring in additional money from your bank account.

The postponement

Today, SEBI postponed the implementation of new norms on upfront margin collection in the cash segment to September 01, 2020. As per SEBI, if stock brokers collect a minimum 20% upfront margin then a penalty for short collection or non collection of margin shall not be applicable. With the new rule all purchases will need 20% cash to be paid upfront to the broker.

Let's see what happens on Sept 01, 2020. SEBI changes or postpones again or implements the same for ever.

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Akshay Seth
Research Analyst (SEBI Regd.)
Linkedin | akshay.equity@gmail.com

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