New SEBI Rules for Intraday Trading in Stock Markets

Due to the Karvy fiasco, and subsequent repercussions, Intraday trading rules were changed for the stock exchange. The Securities and Exchange Board of India (SEBI), recognizing the uncertainty surrounding stock broker firms' ability to be trusted, issued new laws to protect intraday traders. This article will explain these changes to our readers.

What's the Karvy Fiasco?

Karvy Stock broking, a Hyderabad-based company that completes transactions for over one million retail broking clients, is known as. Although the stock broking company promises that customers will receive their investment amounts within three days of the transaction being initiated, many customers didn't receive their funds for more than a week. SEBI investigated and found that the stock brokerage firm had credited the funds to the customers' accounts. This misappropriation of securities led to the SEBI strengthening regulations and transparency for intraday investors.

Updated Share delivery Process

The previous regulations required that bank-owned brokers block the amount due for buying transactions. These stocks will be blocked in the event of a subsequent sale transaction. According to current regulations, bank-owned brokers can block the amount and debit it during trading. This is necessary to ensure funds reach the correct accounts on time. This amount can be either the total traded amount, or 20% of the trade amount. The minimum amount that can be traded is 20%, as per SEBI.

Updated Intraday Trade Method

Many changes were made to India's intraday trading regulations, which are quite different from the one mentioned above.

A power of attorney must be granted to the broker by an investor or trader if they wish to convert their shares to margin trades. To convert shares or trade them as margins, securities must be pledged to the broker.

Profits from intraday trade can not be used for trading in the next day. Investors can still trade intraday if they wish, but the margin money must be paid for each trade. Investors can only use leverage if the margin amount is paid and adhered to. Brokerage firms could earn a percentage of successful intraday trades earlier, which would encourage more trading. Brokerage firms are now required to collect 20% of trade value upfront as part of the margin requirement. This has prevented them from determining their margins and causing problems for their clients. This rule is a significant milestone in Indian trading history. Lower leverage simply means lower overall risk. This will also end the 'T+ 2' system, which allows traders to pay all their investment within two days of initiating a trade.

Prior to the establishment of this rule there were no restrictions on the leverage that stock brokers could offer their clients based on margin requirements. Some brokers gave their clients 100% leverage when they asked for it in order to execute intraday trades. Increased leverage would help traders increase their profits. These customers would be able to pay more if they have excessive leverage. This could lead to broker defaulting, which can also result in customers being worse off. Higher leverage can lead to a faster blowup of your capital.

Share Pledges

A change is required in the Indian regulations for traders to allow for the pledging shares. A lien must be made in favor of the broker if an investor pledges shares to satisfy certain marginal requirements. For marginal requirements, the broker will follow up with this action by pledging the holdings to corporations.

The traders demat account will not allow the shares to move. The previous regulations provided that the broker can pledge shares in its demat account if it has a power to do so.

The broker can generate a unique password before authorising shares. This is possible with the permission of the trader or investor. This gives the trader or investor extra security and acts as a safety net for both the broker and investor. This is a recommended one-time password generator.

The current regulations allow for better corporate actions. Issues pertaining to right and dividend issues can now be credited directly to the customer's account. This adds an extra layer of security for the customer as the issue would previously have been credited to the demat account.

Conclusion

Since December 2020, the updated measures mentioned above have been in effect. To allow traders and investors to get used to the new laws, it will be adopted in three phases, one after the other, so that they can fully understand them.

There have been changes to the share delivery, share pledging, and intraday trading procedures. SEBI made these changes to protect the interests of traders and brokers. After the Karvy scandal, loopholes in Indian trading systems were discovered that needed to be fixed. The current regulations require that amounts be directly credited to traders' accounts rather than being transferred through a broker's demat account. These strict guidelines include specific margin requirements that can be sued. Current regulations allow for the collection of an additional percentage of the trade's upfront value. Additionally, and perhaps most importantly, there are limits on how much leverage traders or clients can request. Customers used to request leverage levels as high as 100%, which could lead to customers having to pay more.