The change in Intraday trading rules with regards to the stock market happened as a result of the Karvy fiasco and its subsequent repercussions. With widespread uncertainty on whether stockbroking firms can still be trusted, the Securities and Exchange Board of India (SEBI) issued new laws to protect the interests of intraday traders. In this article, we break down these laws so that our readers understand these changes.
What is the Karvy Fiasco?
Karvy Stockbroking is a Hyderabad-based firm that executes the completion of transactions for more than one million retail broking customers. The stockbroking firm promises its customers that they will receive their pertinent investment amounts on the third day after the transaction is set in motion but many customers did not receive their funds even after a week. After SEBI investigated the case, it was deemed that this happened as a result of the stockbroking firm crediting the amounts into their own accounts. This misuse in securities paved the way for the strengthening of regulations and overall transparency by SEBI for intraday investors in specific.
Updated Share delivery Process
Previously established regulations stipulated that bank-owned brokers need to block the amount of money that is due when trading a certain amount for buy transactions. These stocks are blocked in the case of a subsequent sale transaction. Current regulations state that bank-owned brokers block the amount but also debit it while trading. This is imperative to ensure that the funds reach the necessary accounts in time. This amount can either be the total traded amount or 20% of the traded amount. This 20% rule is the minimum amount to be traded, as specified by SEBI.
Updated Intraday Trading Process
Unlike the share delivery process mentioned above, quite a few changes have been made to the intraday trading regulations in India.
According to previously established regulations, if an investor or trader decided to convert their shares and trade them as margins, a power of attorney to the broker is required. Now, however, to convert the shares and trade them as margins, the securities need to be pledged with the broker.
The profits gathered from intraday trading cannot be used for further trading within the same day. If investors still desire to conduct their daily intraday trading, the margin money that has to be paid will increase with each trade. Only if this margin amount is paid and abided by can the investor avail leverage (if needed). Earlier, brokerage firms would earn a percentage of the successful intraday trade and would thereby encourage more trading to continue. The collection of 20% of the trade value upfront (as part of the margin requirement) has stopped brokerage firms from determining their own margins and hurting their other clients. This rule can be viewed as a milestone in Indian trading history as lower leverage basically boils down to lower overall risk. This will also put an end to the ‘T + 2’ system that permits a trader to pay the entire investment amount within two days of initiating the trade.
Before the establishment of this rule, no fixed restrictions were set on the amount of leverage based on margin requirements that a stock broking firm could give its clients. This lack of a proper limit resulted in certain brokers giving their clients 100% leverage if they had asked for it to conduct their intraday trades. To increase profits, traders would increase their levels of leverage. Excessive leverage would, in turn, provide these customers with funds to pay that are greater than the amount they can afford. This would hurt the broker (broker defaulting) which would also end up hurting customers. Higher leverage can accelerate the blowing up of the capital that you have invested.
The updated regulations for traders in India specify a change that is to be made for the pledging of shares. To satisfy some marginal requirements, if an investor decides to pledge shares, a lien must be created in favour of the broker. The broker will then follow this action up by pledging the holding to corporations for marginal requirements.
The shares will no longer move from the traders demat account. Previous regulations stated that the pledging of shares will be transferred by a broker in its demat account in the presence of a power of attorney.
With the trader’s or investor’s permission, the broker can also generate a one-time password prior to the authorisation of shares process. This provides the investor or trader with extra security which acts as a safety net between both the investor and the broker. This one time password generation is recommended.
Current regulations extend to bettering corporate actions. For instance, issues pertaining to dividend and right issues are now credited to a customer’s account directly. This provides the customer with an additional layer of safety as it would earlier get credited to the pertinent broker’s demat account.
The above updated measures have already begun rolling out since December 2020. However, to give investors and traders the time to understand the updated laws and get accustomed to it, its adoption will be phased out in three phases after every three months.
Changes have been made to intraday trading, share pledging and share delivery procedures. This was done by SEBI in order to safeguard the interests of both brokers and investors or traders. Following the Karvy fiasco, loopholes were noticed in the Indian trading system that needed to be addressed and eliminated. With the current regulations, stringent rules have been placed on directly crediting amounts to the accounts of traders rather than moving through an indirect route via the broker’s demat account. These stringent guidelines also extend to specific margin requirements being sued in place. The collection of an additional percentage amount of the trade upfront value is also part of current regulations now. Furthermore and most importantly, limits have also been placed on the level of leverage clients or traders can request for. Earlier, customers would request for leverage levels that would sometimes even go up to 100% which would, in turn, place an additional burden on customers to pay the amount back in time.