Pledge, Unpledge: The Chaos Reduces

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In our previous article , we gave you a glimpse of what is happening in an activity which from the outside looks very simple – buying and selling shares. Till all hell broke loose as was bound to happen.

The last few weeks have been crazy for the broker community and therefore in turn, for the investors – and while teams at Prabhudas Lilladher worked at their best – and in some cases for nights in a row without even 2 hours of sleep, the evolving nature of understanding of the circular meant interpretations changed rapidly.

While SEBI came out with its diktat and then the exchanges with the circulars rapidly last month, market systems are just about normalizing. But investor questions remain – why don’t we get limits against certain things and what justification there is for denying something.

Example – I have sold my own stock from the DP – why cant you give me buy limits!

To appreciate this, lets quickly first understand what SEBI might be trying to address.

Potential Risks

So why did these complicated rules come into place? Well probably because of some key reasons including

  • Brokers dipping into DP accounts (imagine someone dipping into your bank account without any instruction from you) and using these shares for their own nefarious purposes because they had a POA
  • Clearing Corporations getting into a tangle with potential sale of comingled, pooled securities of brokers in trouble – selling collateral belonging to clients who didn’t even have a position for those who did and lost much more than their collateral was worth
  • Clients disputing why their DP securities were used to provide limits
  • Challenges around when Bank Guarantees couldn’t be enchased by PCMs as the legal aspects of the BG versus a large clients mark to market loss wasn’t clear
  • Brokers using capital , potentially from clients and potentially unrealized money, to give leverage which increased the potential systemic risks
  • During investigations, they found that an audit trail at the client level was missing as the stocks and funds travelled through a labyrinth of pooled and individual identities
  • And finally, the POA itself – does it give convenience or does it provide unlimited brker control over your investments

So the Guidelines!

The guidelines therefore addressed three vital areas

DP Stock is not Margin-

Like you current or savings account cannot be used as a deposit against a loan you took from a bank, how could your entire DP balance be held hostage? So SEBI converted your DP into your personal untouchable account – and asked you to create a margin deposit separately for your play money! So while you can freely sell from your DP as its your property, any buying or selling of stock that’s not in your DP would require margins first.

Margin is what you pledged as margin

You want to horse around in the markets with stock not there in your DP– please do! But keep a margin for that. And how do you recognize margins – By pledging shares or mutual funds or cash!

Money and Stocks – What is Realised only can be used

  • if you want to sell something you don’t have (BTST), and take auction risk, please do but keep margins for the trade
  • if you want to do trades intraday, please continue doing these as long as you have margin (but oh yes, we will come to this in December 2020) (Intraday Trading)
  • if you want to use intraday profits you made, which are yet to come from the exchanges in payouts, well , sorry, cant be done. (Using Options Sale premium proceeds or profits or sale of DP stock)
  • If you have stock and its paid in early and the Clearing Corporation says ok, by all means trade from the next day.

Implications of all this

While all of the above this has cut off a large part of the market from what were considered margins till August 31 , these will come back into the system slowly. And safely.

And till they do, people will typically find their T+2 ledgers in debit – as DP stock or Unpaid (whats called cusa) will not be counted as margin. To that extent, the leverage cycle shortens.

Holding the client accountable for each trade also means the brokers are in a position as well to maintain their strength and not be susceptible to sudden developments.

This also means a separation between the casual DP based investor – and the heavy trader- and becomes easier for arbitrators to handle the nature of the issues differently.

So while actually nothing changed as far as SEBI was concerned – Remember , they always margined brokers upfront and now they just extended this to clients as well as only asked brokers to start recognizing margins specifically instead of generally counting everything- everything actually went into a spiral!

So why did it happen?

The entire market infra learned how to try and accommodate each other over the past couple of weeks –

  • Exchanges learned why early settlements need to be done later in the evening (from 4.30, the time was shifted to 9 pm),
  • Depositories learned they didn’t have all the details matching what they should have had from their members and made technology changes furiously,
  • Cearing corporations learned they needed to give more information to their members on client level status so stocks could move to and fro smoothely and yes,
  • Back Office vendors learned that SEBI has a different mental setup than what their logic , developed over the years, assumes.
  • Stocks in transit between the various players were not tagged properly so “disappeared” with neither the depository nor the clearing member nor the broker back office knowing what happened as the same stock showed different status at different places– this is just about coming in control

All this dust is still settling down and things will normalize by this month end. And then we will get ready for the next big challenge – Intraday trading!

What Next

Meanwhile, we at Prabhudas Lilladher find this a welcome change. While in the short term, it has been frantic and crazy, it also means responsible broking! Which is what PL is all about.

Existing partners and clients will receive our latest risk management policy by email over this weekend and we hope that you understand the intent of the law, and learn to adjust to the new reality alongwith us and profit from India’s growth story with us, safely!

We have in the meanwhile also shifted our payment gateway link right to the login page at to ensure you can transfer funds straightaway  in case there are some glitches in the value of your pledged stocks with us which is being sorted out. Of course you can do this on our mobile app as well , PL Mobile App, which you can download from Playstore or Apple Store

And yes, we are launching our new Online KYC web based portal, QuickKYC soon, so please do ask all your friends and relatives to sign up with us quickly – we promise you a simple, quick  5 minute online process to start your investing journey comfortably! We will be reaching out to you soon via email on this!

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