What Caused Havoc On The Stock Exchange?

What Caused Havoc On The Stock Exchange?

The Securities & Exchange Board Of India (SEBI) implemented new margin and share pledging norms from 1st September. It has taken the step after several incidents of misuse of client funds were reported. Let’s have a look at the changes and its consequences that lead to, for the first time in history, disruption in the functioning of the stock exchange.

Before you delve into the story, if you want a layman understanding of the financial jargon like margin, intraday, leverage, etc, click here.

Crux of the Matter

What Are The Changes?

  • Traders must keep a higher margin in their accounts to receive the same leverage as before.
  • Brokers not allowed to extend any higher-margin limit than prescribed.
  • The required margin must be paid (by client) or collected (by broker) within T+1 (for derivatives) and T+2 (for equities and commodities).
  • Clearing corporations will impose a penalty if the broker fails to collect, or the client fails to pay.
  • Now clients’ trades will be carried out directly with the Clearing Corporation. It is associated with exchanges to handle the confirmation, settlement, and delivery of transactions.
  • Clients need a minimum margin at the beginning of the transaction as compared to required at the end of the day before.
  • Most importantly, traders will not be able to utilize funds from the selling of shares for 3 days from trading.
  • Now onwards, intraday profit cannot be used to buy new shares.

Experts say that the new margin rules aim to safeguard retail brokers who fail to manage margin leverage.

Another Reason For Change – Misuse of PoA
Previously, brokers used to give margin if the client pledged shares or signed the Power
of Attorney
(PoA). Now brokers will not have power of attorney over their clients’ Demat account. Earlier, some brokers were using one client’s assets as margin collateral for another client who was likely short of funds.

In the past Karvy Stock Broking Ltd. illegally transferred investments of 95,000 clients to its own account and pledged without any authorization. Similarly, brokers misused the PoA assigned to them.

Immediate Chaos
National Stock Exchange (NSE) could not process clearing and settlement for the first time in history on 1st September 2020. Overloading of orders choked the Clearing Corporations’ systems.

SEBI says that chaos happened as brokers waited till the last minute to pledge and re-pledge large quantities of shares. Whereas brokers pointed fingers at the lack of preparation from the depository to implement new changes. In an interim relief to investors, brokers, and the system, SEBI stopped exchanges from imposing fine till 15th September for not paying margin.

Curiopedia
  • The 1992 Indian stock market scam was a stock market scam orchestrated by Harshad Mehta. The scam was the biggest stock market scam ever committed in the Indian Stock Market. It was a systematic stock fraud using bank receipts and stamp paper which caused the Indian Stock market to crash.
  • Popularly referred to as the “Warren Buffett of India”, Rakesh Jhunjhunwala is an Indian businessman and investor. He is the 48th richest person in India, with a net worth of $2.5 billion.
  • The Big Bull is an upcoming Indian Hindi-language biographical crime film based on Harshad Mehta’s life involving his financial crimes over a period of 10 years, from 1980 to 1990. It stars Abhishek Bachchan as Mehta.

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