Mumbai, July 21: The new Sebi margin framework will deal a severe blow to the stock market trading activity as it will directly impact the market turnover. Regulator's move to bring in a new margin framework will directly impact the intra-day turnover both in cash as well as the derivatives market of the stock exchange. The National Stock Exchange (NSE) has the largest share of turnover in both the segments (over 95 per cent).

The cash segment of the NSE recorded a turnover of Rs 56,368 crore on Monday, when the new margin framework to be implemented from the four months from now was announced. In the previous three months of 2020, it recorded an average daily turnover of Rs 50,322 crore (April), Rs 52,656 crore (May) and Rs 61,395 crore (June). NSE’s cash segment recorded an average daily turnover of Rs 36,342 crore in FY2019-20. NSE’s equity derivatives segment is at least 20 times bigger compared to its cash market in terms of volume and turnover. Nevertheless, it is the largest derivatives exchange in the world. It recorded daily turnover of Rs 11.87 lakh crore on Monday.

According to brokerage houses, intra-day margins will go following the implementation of new margin framework and brokers won't be able to offer intraday margins beyond VAR+ELM. This could result in huge reduction in intraday turnover, which is almost 90 per cent of all turnover. This is because if excess intraday margin is provided could result in margin penalty.

Jimeet Modi, Founder & CEO, Samco Securities, said, "This was expected since last year after the November 2019 circular. Now the industry and exchanges will need to adjust to this new reality. This probably will also accelerate the market share towards discount brokers from full service brokers. Differentiated margins were a service offering by a full service broking company, which has now been arbitraged away”.

Informed sources estimated that almost 30-35 per cent of the intra-day turnover is based on additional leverage provided by brokers. Now assuming full margin is required, total turnover would shrink by approx 20 per cent (since balance part margin was still being collected from clients).

Clients will need to maintain a lot more margins for initiating intraday trades. This will see return on investment (RoI) on intraday trading will fall substantially.

This will further take its toll on the volume and subsequently on turnover.

Sebi has made it clear that brokers should fund their clients’ trade through their own (brokers) funds and not through their clients. As most of the small brokers don’t have a high networth and would be unable to fund their clients' trade, it will have its direct impact on the market turnover, explained the sources.

With the liquidity in the market reducing drastically, it will also impact the price discovery process, said sources. Not only that, with the market turnover being impacted, it will also result in sizeable loss of revenue for the government in the form of Securities Transaction Tax (STT).

As per rough estimate, the central government earns annual revenues of Rs 15-15,000 crore per annum from STT. With the reduction of over 30 per cent in the turnover due to the new margin framework, the centre will lose Rs 5,000 crore in revenue and it will be a perpetual loss.