The market regulator SEBI has recently adopted several of the measures aimed at protecting investors’ interests. All initiatives culminated in a higher degree of transparency in the share market, from defining criteria for reporting cash at the client level and bank account balances to standardising leverage. Let’s understand what is margin pledge & How it works?
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What is Margin Pledge?
Margin Pledge is a method of pledging the shares to a stockbroker through exchange for a collateral margin, which you receive after a percentage deduction known as a haircut.
Traders in the F&O category frequently use pledging to obtain margin credit from their brokerage in order to trade in deals with a large initial investment.
In the realm of stock trading, the concept of margin is well-known. It lets investors leverage their funds and invest in deals without taking on all of the risk at the beginning.
In the event that you are unable to repay the margin, the broker will liquidate the shares in your margin account to settle the credit.
Example of Margin Pledge
Let’s use an example to further clarify pledge margin meaning: imagineX is an investor with Rs 2,00,000 worth of RIL, TCS, and Infosys stock.
Now a trade chance presents itself, but X unable to take advantage of it due to a lack of finances. As a result, X made the decision to commit my shares to the brokerage.
He then subtracts a 20% haircut (the amount that covers the risk a broker faces if the collateral stock values move unpredictably) from the total worth of X equities (determined at their current market price), i.e. Rs 40,000, and provides me the remaining Rs 1,60,000 as a collateral margin that X can use for trading activity.
Where investors can use the margin Pledge?
Pledging margin can be employed for intraday trading in the Cash Segment, Futures, and Options writings. After deducting the haircut, the collateral received will be computed using the lowest of the stock’s Last Traded Price (LTP) or Previous Close, and will be updated in real time.
The margin price is not set in stone; it fluctuates from day to day depending on the closing price of your pledged equities.
Each pledging request will be subject to a fee of Rs 10 + GST per ISIN. The penalties for withdrawing a pledge are also the same.
Unpledge
Now that you know what pledging is, you’re probably asking if you can get your stocks back after pledging. Yes, you can do this through a procedure known as un-pledge. The act of retrieving your pledged stocks from the broker is known as un-pledge.
Even though they use phrases like pledge and retrieval, the stocks stay in your DEMAT account throughout the pledge period, and you are able to receive all corporate actions in your DEMAT account, including dividends and bonuses.
Invocation
Invocation is a process in which a broker’s risk team sells a stock to cover the risk associated with pledged clients’ equities.
To clarify, if the market price of the pledged stock falls, the broker will seek additional margin in the form of more stocks, cash, or other form of collateral, and if the investor/user is unable to provide this additional margin, the broker will have to invoke the shares (even though this is extremely unlikely).
New Margin Pledge Rule
The existing system will undergo considerable alterations as a result of it.
The new margin pledge requirements will have a significant impact on all parties involved in stock trading, including investors and brokers, by tightening margin laws.
On August 18, stockbrokers met with SEBI to request extra time to implement new rules, but SEBI refused.
Important Points in New Rule
- SEBI has made it mandatory for brokers to collect margin from investors up front .
- It also put an end to the Power of Attorney practise, which allowed clients to give their broker power to conduct transactions on their behalf. Margin pledging can no longer be done with the same power of attorney.
- Investors who want to use margin must now create a separate margin pledge.
- Previously, collecting upfront margin was not necessary; however, under the new system, investors will be forced to pay at least 30% margin upfront in order to obtain a margin loan.
- Additionally, upfront margin will be forced in the cash segment.
Need of new margin pledge rules
In the cash section, investors did not have to pay any upfront margin. Cash margins have been handled by the broker for many years. Only investors in the F&O segment were obliged to pay margin upfront until November 2019.
However, SEBI has now decided to make the margin restrictions more stringent for everyone. In recent years, SEBI has received reports of irregularities involving some unscrupulous brokers who were abusing a power of attorney that had been granted to them.
According to the new law, all investors must deposit margin even if they try to sell, which means that an investor who is seeking to sell his shares to raise cash must also deposit margin first. Failure to do so will result in a penalty.
Major Issue with New margin Pledge rules
- The new margin pledging guidelines have sparked a lot of discussion. Many think that it will make the trading process more difficult and will discourage many day traders from trading rapidly.
- The exchange now has a T+2 day settlement policy, which means that equities acquired can be settled in two days. The policy of same-day settlement has been introduced under the new standard.
- Furthermore, traders can no longer use proceeds from the sale of stock A to buy stock B. To purchase stock B, they will have to pay a new margin.
- This might put a halt to brokers abusing margin and make the system more efficient. The pledging charge will stay the same, and you must maintain a 50:50 cash-collateral ratio.
Conclusion
The margin pledge facility is a value-added service offered by only a few brokerages and can be a great way for investors to build wealth, but it must be used with responsibility.
This is all from our side regarding What is Margin Pledge? Let us know your views in the comment section.
Other Interesting blogs related to What is Margin Pledge:
What is Span Margin and Exposure Margin?
FAQ about margin pledge meaning in share market
Is margin pledge mandatory?
Stockbrokers are required to collect margins from investors prior to every purchase or sale of stock. Failure to do so will result in a fine. Investors who want to use margin must now create a separate margin pledge.
Is margin pledge good or bad?
When you pledge, you limit your risk exposure to the assets you've utilised as collateral. Although the broker is the custodian of stocks or funds in the margin account, there have been allegations of mismanagement. Some brokerages have been proven to have misappropriated client funds and collateral.
What is margin pledge authentication?
Pledge is a technique in which the shares in your Demat account are given as security in exchange for the margin benefit from your brokerage. The stocks will not be removed from your Demat account. Instead, a pledge in favour of the stock broker will be created.
What happens if you don't pledge margin?
If you do not start the unpledge request or make the required payment to clear the debit balance, Stock broker shall clear the debit balance on T+7day by selling the stocks from their CUSA account.
What is the benefit of margin pledge?
Pledging margin can be utilized for intraday trading in the Cash Market, Futures, and Options writings. After deducting the haircut, the collateral received will be computed using the lowest of the stock's Last Traded Price (LTP) or Previous Close, and will be reported in real time.
