Margin Trading and Securities Lending and Borrowing - SEBI - SEBI/MRD/SE/SU/Cir-15/04

Deputy General Manager Market Regulation Department Email:[email protected] SEBI/MRD/SE/SU/Cir-15/04 March 19, 2004 The Managing Directors/ Executive Directors/Administrators of all the Stock Exchanges Dear Sir, Sub:- Margin Trading and Securities Lending and Borrowing 1. Margin Trading 1.1 SEBI had, vide Circular No.SMD/Policy/Cir-6 dated 7/5/97, clarified, inter alia, that borrowing and lending of funds by a trading member in connection with or incidental to or consequential upon the securities business would not be disqualified under rule/s 8(1)(f) 8(3)(f) of Securities Contract (Regulations) Rules, 1957. In continuation of the said circular, it has now been decided to allow the member-brokers to provide margin trading facility to their clients, in the cash segment, subject to the conditions mentioned in this Circular. 1.2 Securities eligible for margin trading 1.2.1 SEBI vide circular dated March 11, 2003 has categorized the securities under 3 groups, namely, Group 1, Group 2 and Group 3. The securities having mean impact cost of less than or equal to 1 and having traded on atleast 80% (+/-5%) of the days for the previous eighteen months, have been categorized as Group 1. The securities in Group 1 would be eligible for margin trading facility. 1.3 Eligibility requirements for brokers to provide margin trading facility to clients 1.3.1 Only corporate brokers with a net worth of at least ₹ 3.00 crore would be eligible to offer margin trading facility to their clients. The net worth for the purpose of margin trading facility would mean Capital (excluding preference share capital) plus free reserves less non allowable assets, i.e fixed assets, pledged securities, member s card, non-allowable securities, bad deliveries, doubtful debts and advances (including debts and advances overdue for more than 3 months or given to associates), pre paid expenses, intangible assets and 30% of the marketable securities. 1.3.2 The broker shall submit to the stock exchange a half-yearly certificate, as on 31st March and 30th September of each year, from an auditor confirming the net worth as specified in clause 1.3.1. Such a certificate shall be submitted not later than 30th April and 31st October of the year. 1.4 Agreement 1.4.1 The broker shall enter into an agreement with his client for providing the margin trading facility, on the lines of the model agreement, enclosed as Annexure 1. The broker/exchange may modify the agreement only for stipulating any additional or more stringent conditions, provided that no such modification shall have the effect of diluting any of the conditions laid down in the circular or in the model agreement. 1.5 Source of Funds for the broker for providing margin trading facility to his clients and maximum permissible borrowing by any broker 1. For the purpose of providing the margin trading facility, a broker may use his own funds or borrow from scheduled commercial banks and/or NBFCs regulated by RBI. A broker shall not be permitted to borrow funds from any other source. 2. The broker shall not use the funds of any client for providing the margin trading facility to another client, even if the same is authorised by the client. 3. At any point of time, the total indebtedness of a broker for the purpose of margin trading shall not exceed 5 times of his net worth, calculated as stated at para 1.3.1 above. 4. The total exposure of the broker towards the margin trading facility shall be within the self imposed prudential limits and shall not, in any case, exceed the borrowed funds and 50% of his net worth . The term total exposure will mean the aggregate outstanding margin trading amount in the books of the broker for all his clients. 5. While providing the margin trading facility, the broker shall be prudent and also ensure that there is no concentration on any single client. In any case, the exposure to any single client at any point of time shall not exceed 10% of the total exposure of the broker, calculated as per para 1.5.4 above. 1.6 Margin requirements 1.6.1 The initial and maintenance margin for the client shall be a minimum of 50% and 40% respectively, to be paid in cash. For this purpose; 1. initial margin would mean the minimum amount, calculated as a percentage of the transaction value, to be placed by the client, with the broker, before the actual purchase. The broker may advance the balance amount to meet full settlement obligations. 2. Maintenance margin would mean the minimum amount, calculated as a percentage of the market value of the securities, calculated with respect to the last trading day s closing price, to be maintained by the client with the broker. 1.6.2 When the balance deposit in the client s margin account falls below the required maintenance margin, the broker shall promptly make margin calls. However, no further exposure can be granted to the client on the basis of any increase in the market value of the securities. 1.6.3 The exchange/broker shall have the discretion to increase the margins mentioned at 1.6.1 above and in such a case, the margin call shall be made, as and when required. 1.7 Liquidation of securities by the broker in case of default by the client 1.7.1 The broker may liquidate the securities if the client fails to meet the margin call made by the broker or fails to deposit the cheques on the day following the day on which the margin call has been made or where the cheque deposited by the client has been dishonoured. 1.7.2 The broker may also liquidate the securities in case the client s deposit in the margin account (after adjustment for mark to market losses) falls to 30% or less of the latest market value of the securities, in the interregnum between making of the margin call and receipt of payment from the client. 1.7.3 However, the broker shall not liquidate or use in any manner the securities of the client in any situation other than the ones mentioned at paras 1.7.1 and 1.7.2. 1.8 Maintenance of Records 1.8.1 The broker shall maintain separate client wise accounts of the securities purchased on margin trading with depositories and shall enable the client to observe the movement of securities from his account (through internet). The broker shall also maintain a separate record of details (including the sources) of funds used for the purpose of margin trading. 1.8.2 The books of accounts, maintained by the broker, with respect to the margin trading facility offered by it, shall be got audited on a half yearly basis. The broker shall submit an auditor s certificate to the exchange/s, within one month from the date of the half year ending 31st March and 30th September of a year certifying, inter alia, the extent of compliance with the conditions of margin trading facility. This certificate is in addition to the certificate on net-worth specified in clause 1.3.2. 1.8.3 SEBI and the stock exchange/s shall have the right to inspect the books of accounts and/or any other documents maintained by the broker with respect to the margin trading facility. 1.9 Disclosure of exposure to the Margin Trading Facility 1.9.1 The broker shall disclose to the stock exchange/s details on gross exposure including name of the client, Unique Identification Number (UIN) under the SEBI (Central Database of Market Participants) Regulations, 2003, name of the scrip and if the broker has borrowed funds for the purpose of providing margin trading facility, name of the lender and amount borrowed, on or before 12 noon on the following day. 1.9.2 The stock exchange/s shall disclose the scrip wise gross outstanding in margin accounts with all brokers to the market. Such disclosure regarding margin trading done on any day shall be made available after the trading hours on the following day, through its website.. 1.9.3 The formats for such disclosures by the broker to the exchange and the exchange to the public are enclosed at Annexure 2 and 3 respectively. 1.9.4 The stock exchanges shall also put in place a suitable mechanism to capture and maintain all relevant details including member-wise, client-wise, scrip-wise information and source of funds of the members, pertaining to margin trading on their exchange, both on daily as well as on cumulative basis. 1.10 Arbitration 1.10.1The arbitration mechanism of the exchange would not be available for settlement of disputes, if any, between the client and broker, arising out of the margin trading facility. However, all transactions done on the exchange, whether normal or through margin trading facility, shall be covered under the arbitration mechanism of the exchange. 1.11 Investor Protection Fund and Trade/Settlement Guarantee Fund 1.11.1 The amounts lying in the aforesaid funds would not be available for settling any loss suffered in connection with the margin trading facility. However, the aforesaid funds will continue to be available for all transactions done on the exchange, whether normal or through margin trading facility. 1.12 General provisions 1.12.1The brokers wishing to extend the facility of margin trading to their clients would be required to obtain prior permission from the exchange/s where the margin trading facility is proposed to be provided. The exchange shall have the right to withdraw this permission at a later date, after giving reasons for the same. 1.12.2 A broker should take adequate care and exercise due diligence before providing margin trading facility to any client. Any broker providing margin trading facility to a client shall ensure that the client has obtained a Unique Identification Number (UIN) under the SEBI (Central Database of Market Participants) Regulations, 2003. 1.12.3 A client will be allowed to obtain margin trading facility from one broker per exchange for buying securities in that exchange. To ensure this, it shall be obligatory on the part of every broker to, 1. obtain a declaration from his client whether he has availed of any margin trading facility from any broker in any exchange, or whether his request for margin trading with any broker was rejected and if so, in both the cases, obtain the name of the broker and his registration number; and 2. also verify the details from the concerned broker/s. 1.12.4 Before providing margin trading facility to a client who has already availed of margin trading facility from another broker in the same exchange, the broker shall ensure that the client has liquidated his outstanding in the margin trading account with the other broker, and obtain a certificate to this effect in writing from that broker. 2 Securities Lending and Borrowing 2.1 SEBI had, in 1997, formulated a scheme for securities lending and borrowing (copy enclosed as Annexure 4) under which certain intermediaries approved by SEBI could provide the securities lending and borrowing facility. 2.2 The entities desirous of offering the facility of securities lending and borrowing may seek registration with SEBI for the same under the scheme. 1. The clearing corporation/clearing house would require to be registered as an approved intermediary with SEBI, under the SEBI scheme for securities lending and borrowing, for handling settlement shortages. 2. The clearing corporation/house may borrow, on behalf of the members, securities for the purpose of meeting shortfalls, if any, in the settlement, subject to the following : Borrowing by Clearing Corporation/Clearing House 1. The Clearing Corporation/House shall borrow the required securities to meet the shortfall on the day of settlement, for a maximum period of 7 trading days, excluding the day of borrowing. 2. The defaulter selling broker may make the delivery within 3 trading days from the due date, i.e. the settlement date, subject to charges for late delivery as may be prescribed by the stock exchanges. 3. In the event of the defaulted selling broker failing to make the delivery within the aforesaid 3 trading days, the Clearing Corporation/House shall buy the securities from the open market and return the same to the lender within 7 trading days. 4. The cost, if any, incurred by the clearing corporation/house in this regard shall be recovered from the defaulted selling broker. This would be in addition to other penal charges referred to at point (ii) above. 5. The return of the borrowed securities by the Clearing Corporation / House should be independent of the normal settlement. 2.3.3 In case of the inability of the clearing corporation/house to borrow the securities fully or partly for the purpose of meeting the shortfall in the settlement, the outstanding transaction shall be closed out, as described below : The Clearing Corporation/House shall effect close out of such remaining quantity and/or securities by paying monetary compensation to the receiving/buying clearing member/s worked out as under and debiting such amount to the account of the defaulting selling / delivering clearing member/s : 10% on the highest of the closing prices on the days from the trading day till the settlement day. The exchanges and the clearing house/clearing corporation shall closely monitor the shortages in securities in every exchange at the time of delivery in the settlement and shall take appropriate punitive action against any member who is found to be defaulting frequently in the delivery of securities. The following circulars issued by SEBI with respect to auction and/or closing out regarding the cash market stand modified accordingly. 1. Circular No. SEBI/SMD/SE/Cir- 26/2003/25/06 dated June 25, 2003. 2. Circular No. SMD/POLICY/Cir-21/02 dated September 04, 2002. 3. Circular No. SMD/Policy/Cir-08/2002 dated April 16, 2002. 4. Circular No. SMD/Policy/Cir-03/2002 dated January 30, 2002 5. Circular No.TSMD/POLICY/IECG/5548/96 dated December 09, 1996 The stock exchanges are advised to : 1. make necessary amendments to the bye-laws, rules, regulations and listing agreement for the implementation of the above decision immediately. 2. bring the provisions of this circular to the notice of the member brokers/clearing members of the Exchange and also to disseminate the same on the website for easy access to the investors; and 3. communicate to SEBI, the status of the implementation of the provisions of this circular in Section II, item no. 13 of the Monthly Development Report for the month of April, 2004. This circular is being issued in exercise of powers conferred by section 11 (1) of the Securities and Exchange Board of India Act, 1992 to protect the interest of investors in securities and to promote the development of, and to regulate the securities market. This circular will come into effect from April 01, 2004. Yours faithfully, V S SUNDARESAN Encl: 1 Model Agreement to be entered into between the broker and his client 2 Format of disclosure by brokers to the stock exchange 3. Format of disclosure by the stock exchange to the public 4.. A copy of the Securities Lending and Borrowing Scheme