FIIs give the thumbs down to SEBI’s margin call

They are referred to as deep-pocketed investors. And the raw money power of some of these institutional investors can make or mar the fortunes of a stock. Yet, when it comes to the SEBI proposal asking them to shell out margins for cash market trades from April 21, the fat cats of the stock market appear reluctant to reach for their wallets.
“No other market in Asia requires this of institutional traders; Korea and Taiwan do have margining, but selectively on high beta stocks,” said the head equity of a leading foreign brokerage, adding that it would put India at a disadvantage to other competing markets.

At present, all categories of non-institutional investors - retail, high net worth and corporate - have to pay an upfront margin of up to 50% on cash market trades. In most cases, the brokerages fund the margin requirements.
Last week, SEBI issued a circular saying that all institutional trades in the cash market would be margined on a T+1 basis (the day after the trade), with margin being collected from the custodian upon confirmation of the trade. Subsequently, with effect from June 16, the margins would be collected upfront.

At this stage, it is not clear if broking firms executing trades on behalf institutional investors can deposit the margin, or if it will be compulsory for the institutions themselves to fork out the money.

The main reason why institutional investors are opposed to the proposal is that it will reduce the pace at which they can churn their portfolios. This is because a certain portion of their funds would be locked up as margin, which otherwise could have been used to buy stocks.

Still, some of the concerns of foreign institutional investors appear to be legitimate. Paying margins is almost like giving an advance payment on the shares which will be received only two days after the trade has been executed. Some classes of international investors, like pension funds, charitable trusts do not allow for this as they do not want to take on the slightest risk irrespective of how well regulated that market is. There is a fear that these investors may turn their backs on India.

Both institutional broking firms (if they are allowed to fund their clients margins) as well as institutional investors resent the move, because it will mean more of their funds getting tied up in the short term. And that means higher transaction costs.

The other issue is related to the transfer of funds. An institution in the US would have to first inform its global custodian, which in turn would notify the local custodian (in India) to release the funds to the exchange or the broker, whichever the case. If margins are to be paid upfront, real-time transfer of funds could pose a problem due to differing time zones in both markets.

For long, domestic non-institutional investors have been demanding that their institutional counterparts too be charged margins so as to create a level-playing field. And even some of the local institutional players feel the SEBI proposal is in good spirit.

“It is a fair move,” says Abhay Aima, country head equities, private banking and third party products at HDFC Bank. “As markets grow and more players come in, risk will go up. If one has to safeguard the market from growing risks, this is required,” he adds.

Brokers say frequent churning of portfolios by institutional investors especially FIIs has been fuelling volatility on the bourses. “It is a positive move and will ensure more genuine trades (by institutions),” says Ved Prakash Chaturvedi, MD Tata AMC, “Currently, the amplitude of swings is huge. That needs to be dampened,” he added.