SEBI’s New Margin Rules Protect Trading Ecosystem, Says Zerodha’s Nithin Kamath

SEBI’s new margin trading rules protect the entire ecosystem in the long run, according Nithin Kamath, co-founder of Zerodha, India's largest broker.

The guidelines came into force from Sept. 1 after the Securities and Exchange Board of India refused to extend the deadline. These are aimed at bringing transparency and preventing misuse of clients shares by brokers. The changes were announced in February after Karvy Stock Broking Ltd. allegedly pledged client shares to raise funds from the lenders for its own use.

According to the SEBI circular:

• Trading and clearing members were directed to accept collateral from clients in the form of securities only by way of a margin pledge. It prohibited such members from following any other procedure for pledge creation.
• It prohibited transfer of shares to the demat account of a trading or clearing member for margin purposes.
• Brokers will have to collect margin upfront from clients before executing trades.

Directly pledging stocks from the client's demat account to the Clearing Corporation is a much easier process and safer for the customer, Kamath said. "There is one additional step of moving the security manually from your account and pledging it to the clearing corporation, but people have made peace with it."

Upfront margin requirement to buy or sell stocks, on the other hand, could change life significantly, he said, "Especially for people who have built businesses based on relationships where they have collected funds after the purchase of stocks or collected stocks after the stocks are sold."

Watch the full conversation here: