SEBI Circular : How Things will affect Intraday Trading

Since the pandemic, share trading has seen a significant increase in popularity, especially in 2020. Multiple regulations have been issued by the SEBI, the capital market regulator. These regulations are intended to fill in any gaps and strengthen the regulatory framework for the stock markets. The Securities and Exchange Board of India regularly updates the guidelines and rules that producers must follow for trading on public segments. It is important to keep up-to-date with the latest SEBI circulars, as they are issued almost every month. These are some of the changes that were made last year and how they will affect intraday traders.

Share Delivery

The recent circular will not affect intraday traders in the delivery of shares. The latest directive will not affect bank-owned brokers who block margin money and stocks from linked bank accounts when a trade is placed. If there is a buy transaction, bank-owned brokers will block all money from the trade when it is placed. The broker will block stocks if there is a sale transaction.

The current SEBI regulations allow brokers to not only block funds, but also debit them while they trade. You can either stop trading with the whole amount or 20% of the trade amount. Let's take an example. Let's say you decide to buy shares of Asian Paints worth Rs100. The entire amount of Rs100 that you have paid would have been deducted on the next day (T+1), which allowed the broker to pay T+2. The recent mandate means that Rs20 will be deducted on the day of trade.

You could also sell shares of Asian Paints worth Rs100. You may need to deposit a cash margin equal to 20% of the value of your securities before you can transfer them to your broker's account. This change will result in a slight loss of interest on money that is currently held in your broker's bank account.

This shift is sometimes referred to as one from prepaid to postpaid. What does 'postpaid' and "prepaid" mean? This statement was made because most online brokers took cash or securities prior to the trading day. Offline brokers have been known to accept customers' stocks and money on a postpaid basis. Funds are transferred the day after the trade is placed. Because they are dependent on the customer-broker relationship, offline brokerages are more susceptible to being affected by the recent circular.

Pledging Shares

The pledging shares is another way SEBI mandates could impact intraday traders. The latest rules state that if an investor pledges shares to meet marginal requirements, shares won't be moved from its Demat account. Instead, a lien will be created in favor of the broker. The broker used PoA (or a power-of- attorney) to transfer pledged shares from its Demat account. The broker will make a pledge to clear corporations for marginal requirements once he has created a lien.

The broker will need to obtain permission from the investors by creating a one-time password (OTP), before authorizing the pledging of shares. The OPT acts as an extra layer of security between the investor and broker. Intraday traders also enjoy additional benefits. Customers now have direct credit to their accounts the benefits of corporate actions like right and dividend issues. This is in addition to what would previously be credited into the Demat account. Investors will therefore benefit from the new regulations.

Intraday Trading Strategies

Profits from intraday shares cannot be used to trade further that day. These gains are recorded in t+2 day. An intraday trade might result in a profit on Monday. The profit cannot be used for trade activities on Wednesday. Traders will need to adjust their intraday trading strategies in order to comply with the new regulations. Margin money is a requirement that intraday traders will have to increase their ability to hold onto a large portion of their intraday trades. They will not be able to fund it with profits from intraday trading, either partially or completely.

If traders do not choose to meet the minimum marginal capital requirement, they cannot leverage their trades if required. There were no limits on the leverage that a broker could offer to clients before new regulations came into effect. Brokers could offer leverage as high as 100% of marginal trading money to enable them to execute intraday strategies. This practice must be stopped as everyone must receive at least 20% of the trade's value upfront in margin.

The Bottom Line

While the immediate impact of stopping margin trading can be painful, it will lead to less risk over the long-term. Both investors and the broking community will reap the greater benefits. This allows investors to take on less loans, and brokers to have a lower risk of default.