The big rally seen in Indian equities over the past two days in the wake of major corporate tax cuts announced by Finance Minister Nirmala Sitharaman has major hurdles awaiting.
Two important regulatory events are going to play out in the market over the next few days, which have the potential to halt the rallying stocks on their tracks, say analysts.
Sebi’s new provisions related to use of clients’ securities by brokers become applicable from October 1, while the removal of nearly a dozen stocks from the F&O segment on NSE start from the October series.
The deadline for brokers to not hold client securities’ in their pool accounts finally takes effect on October 1. As per the rules, brokers now have to compulsorily give shares back to their clients. Some reports suggest brokers were holding over Rs 7,500 crore worth of midcaps and companies outside the highly liquid group-A.
In June, Sebi barred trading members from pledging certain securities of clients to banks and non-banking financial companies (NBFCs) to raise funds even with authorisation from investors and traders. The new regulations that become applicable from October say “securities lying with trading members/clearing members in clients’ collateral accounts, client margin trading securities accounts and client unpaid securities accounts shall not be permitted to be pledged/transferred to banks/NBFCs for raising funds by trading members/clearing members.”
Until now, brokers used to take loans on client’s shares which were available in the pool account. They used to utilise that money for margin funding or other fund raising.
Now, brokers will need to ask clients to sell those shares to the entities with whom these shares have been given as collaterals for margin funding, so that they can repay the loans. Thereafter, lenders will release the shares and brokers will be able to give the same back to the original shareholders.
Analysts say there is a margin facility where clients would pay a margin, anywhere in the range of 40 per cent and more, and the rest is funded by pledging of the securities with either an NBFC or a bank. This is the formal structure through which the margin lending facility works for retail clients.
However, there are clients who would not opt for such margin trading facilities, as it involves higher net-worth and some costs, compliance requirements are higher. To cater to such clients, brokers usually offer an informal way of providing this facility indirectly.
They would offer a T+3 or T+5 (trade plus 3 or 5 days) facility wherein the client would buy and hold the security approximately four times the amount (25 per cent margin, approximately) and would be allowed by the broker to hold them for three to five days, following which it would be compulsorily squared off. The bourses will have their scheduled pay-ins on T+1 day, as it is not concerned about the arrangement between the broker and the client.
“Once the shares are delivered, instead of passing them on to the client’s DP accounts, the brokers would put them in their pool accounts and obtain funding against them. This is what will be stopped after the Sebi circular takes effect. It means either you can have a formal margin funding arrangement or nothing at all. Securities will have to stay in clients’ DP accounts, and not in the pool accounts as it used to be the case earlier,” said Milan Vaishnav, CMT, MSTA, Consultant Technical Analyst at Gemstone.
Market capitalisation of BSE-listed stocks spiked by over Rs 10 lakh crore after Finance Minister Nirmala Sitharaman on September 20 announced a Rs 1.45 lakh crore fiscal stimulus by slashing corporate tax to 22 per cent from 30 per cent and cutting down the minimum alternate tax (MAT) to 15 per cent for companies putting fresh capital into manufacturing.
The reduced corporate tax rate of 22 per cent would apply to domestic entities that do not avail any exemptions and other tax incentives. Also, these companies will not be required to pay any MAT. The effective tax rate, in this case, would be 25.17 per cent, including cess and surcharge.
While this triggered a runaway rally, the market may see a rise in volatility once this euphoria wears off.
NSE will remove nearly 12 stocks from the F&O segment starting with the October series. DHFL, Engineers India, Arvind, MCX, Hindustan Zinc, Raymond and IDBI Bank are some of the stocks to be excluded from the derivative segment.
Some analysts say this event would pass off without any hitch. “Exclusion of stocks from the F&O segment does not necessarily mean the stock prices in the cash market will be impacted. It does not even impact arbitrage funds,” said Jay Thakkar, CMT, Head Derivatives and Technical Research- AVP – Equity Research at Anand Rathi Financial Services.