A committee advising the stock market regulator on systemic issues has recommended that the regulator address a disconnect in regulations by which investors are able to leverage their trades many times over the amount that the Securities and Exchange Board of India (SEBI) permits.
SEBI regulations do not allow brokers to provide their clients exposure which is more than twice their given capital. However, most large brokers have Non-Banking Finance Company (NBFC) arms through which they provide up to five times exposure. This falls into a regulatory grey area since NBFCs are technically under the RBI.
The 19-member Secondary Market Advisory Committee discussed the issue recently at a recent meeting according to two people familiar with the matter and has passed on recommendations to the regulator on the same.
“There should be some parity between the two. We have advised Sebi accordingly,” said one of the sources.
“Sebi has taken cognizance of the same. It has written to the Reserve Bank of India to discuss how the matter can be addressed,” said a second source.
Under the Sebi rules, if a client has Rs.200, a broker can only allow him to trade worth Rs.400. However, this exposure can go up to Rs.1000 if it is done through the NBFC arm.
Karthik Srinivasan, Co-Head Financial Sector Ratings at ICRA Limited said that any tightening of norms may have an adverse impact on cash market volumes.
“While SEBI allows brokers to provide margin funding, the customer has to provide an initial margin of 50%, the RBI has no such specific stipulations for capital market exposures of NBFCs. If this grey area was to be addressed by the regulators, then there could be an adverse impact of 10-20% on cash market volumes since most of the funding is for this segment,” he said.
This in turn would also affect profitability for brokerages.
“In such a case, the profitability for brokerages may be affected because of reduced trading volumes while the impact on NBFC arms will depend on the extent of their non capital market related lending operations. The total capital market related loan book of NBFCs is estimated to be around Rs.30,000 crore including activities such as promoter lending and loan against securities in addition to margin financing,” he said.
Meanwhile, others pointed out that there falling equity market participation has also hit the amount of lending actually done for margin funding.
“Capital market activity has been muted in recent times and lending opportunities have been limited,” said Sameer Kamath, chief financial officer at Motilal Oswal Financial Service.
Those watching the industry peg the amount spent on margin-funding to be between Rs.5000 crore to Rs.8000 crore.
The RBI’s Report of the Working Group on the Issues and Concerns in the NBFC Sector had noted the need to align the regulations with Sebi rules.
“NBFCs may be subject to regulations similar to banks while lending to stock brokers and merchant banks and similar to stock brokers, as specified by the Securities and Exchange Board of India (SEBI), while undertaking margin financing,” said a statement issued when the report was released.
SEBI regulations do not allow brokers to provide their clients exposure which is more than twice their given capital. However, most large brokers have Non-Banking Finance Company (NBFC) arms through which they provide up to five times exposure. This falls into a regulatory grey area since NBFCs are technically under the RBI.
The 19-member Secondary Market Advisory Committee discussed the issue recently at a recent meeting according to two people familiar with the matter and has passed on recommendations to the regulator on the same.
“There should be some parity between the two. We have advised Sebi accordingly,” said one of the sources.
“Sebi has taken cognizance of the same. It has written to the Reserve Bank of India to discuss how the matter can be addressed,” said a second source.
Under the Sebi rules, if a client has Rs.200, a broker can only allow him to trade worth Rs.400. However, this exposure can go up to Rs.1000 if it is done through the NBFC arm.
Karthik Srinivasan, Co-Head Financial Sector Ratings at ICRA Limited said that any tightening of norms may have an adverse impact on cash market volumes.
“While SEBI allows brokers to provide margin funding, the customer has to provide an initial margin of 50%, the RBI has no such specific stipulations for capital market exposures of NBFCs. If this grey area was to be addressed by the regulators, then there could be an adverse impact of 10-20% on cash market volumes since most of the funding is for this segment,” he said.
This in turn would also affect profitability for brokerages.
“In such a case, the profitability for brokerages may be affected because of reduced trading volumes while the impact on NBFC arms will depend on the extent of their non capital market related lending operations. The total capital market related loan book of NBFCs is estimated to be around Rs.30,000 crore including activities such as promoter lending and loan against securities in addition to margin financing,” he said.
Meanwhile, others pointed out that there falling equity market participation has also hit the amount of lending actually done for margin funding.
“Capital market activity has been muted in recent times and lending opportunities have been limited,” said Sameer Kamath, chief financial officer at Motilal Oswal Financial Service.
Those watching the industry peg the amount spent on margin-funding to be between Rs.5000 crore to Rs.8000 crore.
The RBI’s Report of the Working Group on the Issues and Concerns in the NBFC Sector had noted the need to align the regulations with Sebi rules.
“NBFCs may be subject to regulations similar to banks while lending to stock brokers and merchant banks and similar to stock brokers, as specified by the Securities and Exchange Board of India (SEBI), while undertaking margin financing,” said a statement issued when the report was released.
