Market regulator Sebi's recent decision to revise penalty on stock brokers and their clients for their failure to deposit margins fully or partially has left the market participants worried about its implications.

Most brokers fear that the move will adversely impact participation of investors in the derivatives segment. Investors may have to cut their outstanding positions thereby affecting liquidity in the system, as brokers would be compelled to demand additional margins to avoid being subjected to penalty.

Brokers' concerns are echoed in the presentation made by the Association of National Exchange Members of India (ANMI) and BSE Brokers' Forum, two recognised associations of stock brokers, to Sebi on inconvenience that market participants are likely to face due to the new penalty structure.

The associations have approached the market regulator with a request to continue with the earlier penalty structure and also suggested that the same could be reviewed and the rates could gradually be reduced if warranted by the situation based on the review of actual collection data and compliance level.

Under the margining system, an investor pays a certain percentage of the purchase price upfront and the broker lends the balance amount. The buyer pays interest on the loan, in addition to commission payable to broker.

Brokers feel the penalty is too high on false reporting of margin collected from clients, for which the rate is 100% of the amount. There will also be suspension of trading for one day in that segment. "We face many practical issues relating to margin payment which are unavoidable and which should have been considered before levying penalty," said a broker who wished not to be quoted.

Further elaborating on the issues, he said, "Exact margin is not known as a client goes by the previous day's margin file. There are cases, where margin varies to the extent of even 40% in a specific stock due to high volatility. Sebi has prescribed a 3% variation in the index, but there is no relaxation for price variation in individual stocks which can go up or down over 10% in normal trading".

It is learnt that Sebi will look into the presentation made by brokers' associations. But it is unlikely that the regulator will review the new structure since the revision in penalty was done after consulting stock exchanges and market intermediaries.

The revision in penalty for a shortfall in margin or non-payment of margin is with effect from September 1. Every member will be liable to pay penalty of 0.5%, if the amount of margin to be recovered from each client is less than 1 lakh and 10% of applicable margin. If the amount is 1 lakh and higher, or it is 10% and above the applicable margin, the rate will be 1%.

According to the old structure, there was no penalty, if margin shortfall is less than 1% of the applicable amount. On the higher side, the penalty was Rs 1,000, or 0.1% of the shortfall (whichever is higher), subject to maximum of Rs 1 lakh. (Economic Times)