This new mechanism was to be effective from June 01, 2020, is now extended to August 01, 2020, due to the Covid-19 pandemic.
Let’s get a brief idea about the existing mechanism and how the new mechanism will work.
In the present mechanism, an investor if wish to trade in the capital market, He/She can do it either by transferring funds or through Demat holding transfer towards margin requirement for positions. Our main focus will be on the option of transfer of Demat holding because its the subject matter. This whole process works because of the power of attorney (POA) which is given to broker as to save investors’ efforts such as giving instruction slip to transfer Demat holding each and every time which broker of the Demat account does on behalf of the investors to ease the operation.
In turn, the broker uses the investor’s collaterals to get limits/margins for itself to fulfill the investor’s margin obligation by pledging the same to the clearing corporations/members (CCs/CMs). This process is in effect around two decades.
Proposed Mechanism Work
In the coming mechanism, investor holding will skip getting transferred to the broker’s collateral account. Instead, it will create a lien in the broker’s favor through which investors could create positions. This lien is denoted with Margin Pledge.
In turn, the broker will repledge the holding in favor of clearing corporations/members (CCs/CMs). This process is called margin re-pledge. The investor could see the status in their Demat holding account, as to how much is pledged and how much re-pledged by the broker in turn.