The market regulator, Securities, and Exchange Board of India (SEBI) implemented the new margin pledge norms on Tuesday .i.e on 1st September 2020. This new set of norms aims to safeguard the rights of the investors by increasing transparency in the stock market.
These norms were drafted back in February 2020 and were planned to be implemented from 1st June 2020 but got extended to 1st August 2020 and now finally got implemented on 1st September 2020.
So, we are here to discuss the possible impacts of the new margin pledging norms on your trading strategy.
What is Margin Pledging Norms?
It is made up of two words Margin + Pledging.
Margin is collateral that allows you to leverage and invest in deals without assuming the full risk at the first stage because using margin you are not using your own money. It is the money that an investor borrows from a brokerage firm. Margin increases the buying capacity of the investors.
In any case, you are unable to repay the margin the broker of the firm from where you have borrowed the margin will liquidate the stocks in the margin account to recover its debt amount.
Pledging is the process of using your stocks as securities in order to get a loan.
The broker acts as a keeper for the securities or funds under the margin account. However, SEBI reported certain cases on the violation of margin collateral where some brokers were misusing the investor’s funds. From this problem, the new Margin of Pledging Norms comes into the picture.
Trading after the new Margin Pledging Norms
- There will be some changes in the existing system after the implementation of the new margin pledging Norms
- The new margin pledging policy will be important for all involved in it.
- Now it is mandatory for the brokerage to collect margin upfront from its client
- ‘Power of Attorney practice’ will no more be effective. Under this practice broker used to perform all the transactions on behalf of their clients.
However, currently, this set of new norms are surrounded by many debates.