NSE removed 1,010 stocks tightening margin trading collateral rules: Report

The National Stock Exchange (NSE) in a recent circular announced that the exchange has cracked down on the list of stocks eligible to be used as collateral for margin funding, reported Moneycontrol.

Out of the list of 1,730 eligible stocks, the exchange has removed 1,010 stocks including companies like Adani Power, Yes Bank, Suzlon, Bharat Dynamics, and Paytm, effective starting August 1, 2024, as per the report.

As per the NSE circular, the exchange will only accept collateral for the securities traded at least 99 per cent of the days in the last six months with an impact cost of up to 0.1 per cent for an order value of ₹1 lakh, from August 1.

What does this mean for a trader or an investor?

A financial institution like a bank or a non-banking financial company (NBFC) keeps an asset as collateral in exchange for a loan to maintain security in case of a default. The money lent can be recovered by selling the asset, in case the borrower declares bankruptcy or loan defaults.

Assets like houses, cars, and gold even company stocks can be leveraged to get a loan in exchange. In this case, the broker offers a short-term loan in exchange for the existing shares held by the trader, but the exception is that not every company shares are eligible to be leveraged for a loan.

The market regulator sets certain rules to ensure that the shares which comply with the set rules are allowed to be mortgaged to receive a loan. The regulatory crackdown is now resulting in the list of shares to reduce in the coming time.

Stocks like Adani Power, Yes Bank, Suzlon, HUDCO, Bharat Dynamics, Bharti Hexacom, IRB Infra, NBCC, Paytm, Inox Wind, and JBM Auto will be part of the exclusion from the list of stocks eligible to be used as collateral for margin funding. The total number of stocks excluded from the list stands at 1,010 stocks.

What is Margin Trading?

The fundamental concept of taking a loan to buy something now and paying for it later is what it is for ‘margin trade financing’. The ‘Buy Now Pay Later’ process in margin trade financing (MTF) allows investors to buy shares for a fraction of the current price. The rest of the money is paid by the broker in exchange for an interest, like a loan.

What does this crackdown mean for the market?

The method of margin trading benefits both the trader and the broker, as the trader can make big bets with access to the bigger capital, and the brokerage earns interest from the loan given to the trader.

The impact of this new order will be a reduction in risk related to funding. The stocks remaining on the list have very high liquidity and are considered to be strong stocks, as per a CNBC-TV18 report.

Investors pledge their shares with the broker, and then the broker pledges these shares with the clearing corporation, reported CNBC-TV18 quoting Ashish Rathi, director at HDFC Securities.

The process of pledging shares with the clearing corporation will be affected due to the corporation accepting fewer shares than before according to the new rules, as per the report. It will not have much impact on the margin trading facility book because strong and liquid stocks remain on the list, said Rathi, as per the CNBC-TV18 report.