Pledging and Re pledging of Stocks is the New way to get Stock based Margins !
Over the last few weeks, there has been a lot of hue and cry over the new Margin system. This is the immediate reaction to SEBI’s new rule that was released recently which is yet again to protect the interests of Investors and Traders. From reporting of client level cash & bank account balance to standardising leverage across the industry, all steps culminate in protection of investor interest and the orderly development of Capital markets. The new pledging mechanism too is aimed to further safeguard investors.
A brokerage is the custodian of client funds & securities. When you transfer funds or stocks to your broker, you’re entrusting him/her with the responsibility of handling these assets without any prejudice. That said, there still are reports of brokers misusing client funds and/or securities entrusted to them. In the aftermath of these episodes, SEBI has taken further steps to strengthen the regulatory framework which has led to the genesis of the new pledge-unpledge system for stocks.
When you want to trade with your broker, you need to maintain margins for your trades. Margins can be in the form of cash or stocks. Transferring cash is straight forward. As far as stocks are concerned, till recently, whenever a client wanted to pledge his stocks to obtain margins, he had to transfer securities from his account to the broker’s account. The broker then would pledge these securities to the Clearing Corporation. This transfer of title (ownership) of the securities left a gaping hole in the system, allowing (certain) brokers to misuse these securities. This problem was addressed by introducing the new pledge system that will go live from September 01, 2020.
In the new pledge system, the stocks don’t leave the investor’s demat account, instead a pledge is marked in favor of the broker. The broker is required to open a separate demat account labelled ‘TMCM – Client Securities Margin Pledge Account’ for this purpose (TMCM stands for Trading Member Clearing Member). The broker then re-pledges these securities in favour of the Clearing Member (CM) / Clearing Corporation (CC).
Some of benefits of the new pledge system are as under:
- No misuse of securities : Since stocks don’t leave the investor’s account, there’s less chance of misuse of securities. Also, it wouldn’t be possible to pledge one client’s stocks to offer margin to a different client. Since the brokers are allowed to re-pledge the pledged securities onwards to CM and CC, there would be a complete audit trail in your DP account even if the broker re-pledges your pledge securities onwards to the CM and CC.
- Corporate actions : In the existing title transfer system, since the stocks are held in the broker’s collateral account, the broker is the recipient of all cash and non-cash corporate actions like dividends, bonus, rights, etc. Once the broker receives this, the broker would then transfer these benefits to the client manually. This could lead to loss of time and even the corporate action benefits if the broker is not prudent and client not savvy. However, in the new Pledge system since the stocks don’t leave the client DP account all corporate actions mentioned above come directly to you and not the broker. This eliminates any chance of you missing out on corporate actions and makes life easy for brokers too.
- Pledge allowed for all approved securities : In the title transfer system we did not accept title transfer of all instruments allowed by the Exchanges. For example, certain liquid funds pay dividends in the form of more units of the same fund. The operational nightmare around reconciling the dividends received and transferring them to the investors has held us back from accepting these instruments as margins. Going forward, since the stocks are all held in the client’s own account, any approved security will be accepted for pledge.
What is the process at Tradeplus?
With recent clarifications coming in from Regulators where a parallel system of title transfer and pledge has been allowed till 31st August 2020. Hence we are introducing the following new facilities to set up a process that complies with the New Regulations
Facility to Pledge stocks : This is a feature that we had worked to allow you to pledge stocks online. The process of placing online pledge request is explained below:
- Identify the stocks from your holdings list which you would like to place under pledge
- Email the list to [email protected] with a request to place them under pledge
- Based on your email request, we will initiate the pledging process
- Once the Pledge Initiation process is completed at our end, you will receive a SMS from NSDL as seen below, to your registered mobile number
- The same details will be sent to your registered Email id as well
- Click on the link which you receive in the SMS / Email
- This will take you to the NSDL Page where you will be prompted to key in your PAN number as shown below
- Key in your PAN number. On valid entry, a new page will open with the list of stocks and quantity on which you had requested to mark pledge as shown below
- Select the check boxes and Confirm
- You will then receive an OTP via SMS to your registered Mobile number as given below
- The OTP will also be sent via Email from NSDL to your registered email id
- Enter the OTP on the NSDL page to approve the pledge.
- Once the pledge is approved, margins will be provided against the pledged stock from T+1.
- To unpledge, simply email us at [email protected] with a request to unpledge. The stocks will be unpledged from the Clearing Corporation (provided they aren’t blocked for margins) that is the lien on the stocks will be unmarked and the stocks become free securities in the demat.
- All Unpledge requests received by us by 4 p.m. on working days will be processed same day and you would be able to sell the shares from your demat account on our trading platform the next trading day, provided the unpledge request is successful and no lien / margin is utilised against the pledge shares due to your existing positions.
The fee for pledging will continue to remain the same. This is because there’s a cost levied by the depository to create the pledge and re-pledge. Additionally, also note that as a client you’ll have to continue maintaining positions in the cash:collateral ratio of 50:50 (we will soon implement this feature), failing which interest will be levied. If you fail to meet your margin obligations, the broker will have the right to invoke the pledge and sell them to revoke the dues.
Hence, we encourage you to avail the new margin pledge facility for placing margins with us as per the process mentioned above and maintain sufficient margins for your positions.