In what has been a swift move across the terrain impacting the stock brokerage industry, SEBI has finally put pen to the paper to the new margin leveraging regulations. This new norm from SEBI supports Invest19’s vision to stop margin leveraging and boost the pace of the stock investments in India. Although it was previously in the pipeline for months, the timing of the new regulations coming into effect right from the New Year 2020 has created a big setback for the entire industry, albeit for the traditional names.
Where most of the press has covered the news as one of the worst things to hit the industry, the outset is quite different if you cast a keen eye on it. This announcement comes across as a measure after plenty of financial frauds have been sighted for the last couple of years. The new regulations in place allow a broker to lend only the amount as much as their own capital thus putting an end to the margin leveraging, which was practised by the traditional brokers since time in a bid to grow their business. This may affect the equity delivery volumes in the short run but looking at the bigger picture, this will boost the ecosystem plentiful.
This new announcement will bring forth long term sustainability in the market and will put an end to the practices of the over-leveraging. This will help create a dedicated client base with an increased life cycle where the allure of over leveraging offered by competitor brokerage firms will be a bygone concept. This will also help to reduce market fluctuations and stop-loss triggering.
This may essentially see a decline in brokerage earning by over 25% and may hamper the traditional brokers and other names who have been banking on the over-leveraging aspect for their revenue operations. It is also likely to see the increase in the capital requirement for the firms. The necessary steps will be to guide the clientele about the regulations put in place by SEBI and guide them for the equity, options and currency trading. This may take a period of 2-3 months to get it up and running as the market observes a transition period. But once the transition period is done by the trading quantity options, equity and currency volumes will increase in the long run.