Understanding the new margin pledge system — effective Aug 1, 2020

July 21, 2020

The three principal objectives stated under SEBI’s preamble are:

  1. To protect the interests of investors in securities;
  2. To promote the development of the securities market; and
  3. To regulate the securities market.

If you’ve been following the actions of the market regulator closely, you’ll notice a spate of regulations introduced in recent years, all conscientiously aimed at protecting the interest of investors. From reporting of client level cash & bank account balance to standardising leverage across the industry, all steps culminate in achieving the three principal objectives listed above. The new pledging mechanism too is aimed to further safeguard investors.

A brokerage is the custodian of client funds & securities. When you transfer funds or stocks to your broker, you’re entrusting him/her with the responsibility of handling these assets without any prejudice. That said, there still are reports of brokers misusing client funds and/or securities entrusted to them. In the aftermath of these episodes, SEBI has taken further steps to strengthen the regulatory framework which has led to the genesis of the new pledge-unpledge system for stocks.

When you want to trade with your broker, you need to maintain margins for your trades. Margins can be in the form of cash or stocks. Transferring cash is straight forward. As far as stocks are concerned, today, when a client wants to pledge his stocks to obtain margins, he has to transfer securities from his account to the broker’s account. The broker then pledges these securities to the Clearing Corporation. This transfer of title (ownership) of the securities leaves a gaping hole in the system, allowing (certain] brokers to misuse these securities.This problem was addressed by introducing the new pledge system that will go live from August 01, 2020.

In the new pledge system, the stocks don’t leave the investor’s demat account, instead a pledge is marked in favor of the broker. The broker is required to open a separate demat account labelled ‘TMCM – Client Securities Margin Pledge Account’ for this purpose (TMCM stands for Trading Member Clearing Member). The broker then re-pledges these securities in favour of the Clearing Corporation and obtains margins.

Some of benefits of the new pledge system are as under:

  1. No misuse of securities: Since stocks don’t leave the investor’s account, there’s less chance of misuse of securities. Also, it wouldn’t be possible to pledge one client’s stocks to offer margin to a different client.
  2. Corporate actions: In the existing pledge system, since the stocks are held in the broker’s collateral account, the broker is the recipient of all cash and non-cash corporate actions like dividends, bonus, rights, etc. While the broker is required to voluntarily transfer these benefits to the investor, a non-savvy investor may miss out on claiming such credits in the event that the broker doesn’t.
  3. Pledge allowed for all approved securities: Some brokers (including Zerodha) don’t accept pledge of all instruments allowed by the Exchanges. For example, certain liquid funds pay dividends in the form of more units of the same fund. The operational nightmare around reconciling the dividends received and transferring them to the investors has held us back from accepting these instruments as margins. Going forward, since the stocks are all held in the client’s own account, any approved security will be accepted for pledge.
  4. Facility to sell pledged stocks: This is a feature we’re working on making available, allowing you to sell pledged stocks without having to request for unpledge and wait until they are received to your demat account. With the new pledge system it becomes much easier to deploy this. This covers the risk from market movements in the stocks you’ve pledged.

What will be the process at Zerodha going forward?

We’ve largely kept the process unchanged, except having to add a few additional steps whereby a client is required to authorise the pledge by entering an OTP on CDSL’s website, just like the TPIN based pre-authorisation for selling stocks. Since CDSL is still working on building full fledged APIs, the investors will have to access this link through an email sent to them to enter the OTP and authorise the pledge. The process is explained below:

  • Log into Console.
  • Go to the Holdings page. A list of stocks that can be pledged is displayed here.
  • Select the stock you wish to pledge, enter the quantity, and click on pledge.
  • CDSL sends an email to your registered email ID with a link to approve the pledge
  • Upon visiting the link, an option to generate OTP is given. This then sends an OTP to the registered phone number & email ID. Enter the OTP on the CDSL page to approve the pledge.
  • Once the pledge is approved, margins will be provided against the pledged stock from T+1. Once the full fledged APIs are available, we’ll work at providing near real-time margins against pledge.
  • To unpledge, simply visit the holdings page and request an unpledge. The stocks will be unpledged from the Clearing Corporation (provided they aren’t blocked for margins) that is the lien on the stocks will be unmarked and the stocks become free securities in the demat.

The fee for pledging will continue to remain the same. This is because there’s a cost levied by the depository to create the pledge and re-pledge. Additionally, also note that as a client you’ll have to continue maintaining positions in the cash:collateral ratio of 50:50, failing which interest will be levied. If you fail to meet your margin obligations, the broker will have the right to invoke the pledge and sell them to revoke the dues.

All new pledges will have to be created through the new pledge system effective August 01, 2020. Brokers have been given time until the 31st of August to return all securities pledged using the existing framework and route them through the new pledge system. In due course, we’ll communicate the process of un-pledging to you. Please ensure to maintain sufficient margins for the positions you’ve taken.

Update: SEBI, vide this circular has allowed the present system of margin pledge to be available till the 31st August 2020. The new pledge system will be made live soon and in due course, we’ll communicate the process of un-pledging to you.

Venu

Operations @ Zerodha

114 comments

  1. Sachin says:

    For existing pledged shares, are you going to charge un-pledging and pledging charges again?
    what if client used SLB for pledged shares? will that be allowed?

  2. AK says:

    Once the stock unpledge during the day, will i be able to sell the stocks on the same day or next day ?

  3. samudra says:

    Will it affect the current margin level, like 6% for CO for HUL? Will it get reduced?

  4. jithinj v says:

    Will it effect the intraday leverages provided by zerodha??

  5. Sachin Singh says:

    80 % of my money is invested & pledged with Liquid/Overnight funds.
    a) So till 31st July, I can continue taking overnight positions with the pledged money as well, right?
    b) For people who are already invested & pledged somewhere, the time is till 31st August to switch to the new system?
    b) Till around when can we expect some clarity on unpledging and then pledging again? One day before & on expiry day, full margin is needed, so hopefully some time will be given to switch over.

    Thanks.

    • Matti says:

      a) Yes.
      b) & c) Yes, we will email you first and then unpledge your existing pledges. You can re-pledge immediately.

      • Johar says:

        To unpledge, I will have to close all my positions and unpledge . If I close my positions today, can I unpledge today itself or wait for a day ?
        To open positions again, I will have to wait for day as margin will be available only after that. Am I right ?

      • johar says:

        if we re-pledge, will you give margin immediately, or will take a day to give. what will happen to positions with out margin ? do we need to pay short fall margin penalty ? I have 2cr margin. that means I have to pay 2L per day penalty till I get margin ?

        • Matti says:

          You will need to have margins for your positions. Positions may be squared-off or attract penalties if not. Since this is a regulatory change, we are required to unpledge and you would need to re-pledge. However, we’ll do this activity over a weekend so you can re-pledge easily. Margins from re-pledge will be available from T+1.

          • johar says:

            So to be specific,
            I will have to close all my positions that need margin from Pledged Shares/MF on 31st Evening . You will unpledge over weekend. On Monday(3rd August) I will have to re-pledge. I will receive margin on Tuesday. then I can enter positions. Is this correct. ( I will be out of business from Friday night to Tuesday)
            Can we distribute this process through out Auguest ?

  6. Abinav says:

    What all securities are currently available to be pledged which Zerodha is not providing due to operational overhead as mentioned in the post?

    Can i find the list someplace?

  7. Shanay Khemani says:

    Currently, Zerodha doesn’t allow pledging of SGB’s. With the new change will I be able to pledge my SGB’s as well?

    • Matti says:

      No, SGBs aren’t on the approved list of securities for pledging.

      • Shanay Khemani says:

        As per NSE, they are allowed for pledging. But not in the Zerodha list of approved securities. Had a support ticket raised regarding this as well. What am I missing?

        • Geetika says:

          Absolutely, Matti please answer this. There indeed are so many SGBs (different tranches) at NSE list of approved securities.

  8. What about quarterly settlement says:

    Is there any changes regarding repledging on quarterly basis

  9. Mach says:

    Please expand your pledge list and include corporate bond and other debt funds and also all equity funds available on coin.

  10. Poonam says:

    Will POA still be required ?

  11. Pradeep Kumar inani says:

    I rather find strange that you are suggesting that current stocks which are pledged needs to be unpledged and repledged .

    The new system entails that security would now reside in clients dmat account, so you can transfer it from your pledged pool and immediately shift it TMCM account of the client . All the new pledge action can after the cutoff date can follow the new procedure.

    By adopting unpledging and repledging process lacs of Rs would be moped from investor as they would be required pay pledging charges two times.

    This certainly would make investors poorer by this amount.

    • Matti says:

      No Pradeep, that’s not possible since the new pledge requires you to approve the request by an OTP sent to your registered contact details as explained in the post above.

  12. Nirav says:

    Regarding ” All new pledges will have to be created through the new pledge system effective August 01, 2020.”

    The new pledge system starts in Console also from 01 August 2020 ?

  13. Naeem says:

    sir what about old clients we also want tpin security for selling shares.when it will start for old customers.

  14. Mani says:

    All new pledges will have to be created through the new pledge system effective August 01, 2020. Brokers have been given time until the 31st of August to return all securities pledged using the existing framework and route them through the new pledge system.

    Does the above statement mean that – we can manually un-pledge old framework and shift to new framework step by step all through August (30 day window) ?

    The reason i am asking is – i have Dec 2020 Options selling Positions which are using the Equity pledge Margins … It would be nice if i dont lose the “Margins Fully” from Equity Pledge while the pledge is transferred from the old framework to the new one … If i have the 30 day window in August to shift in phases (20% of my portfolio each day) – that would be nice

  15. Moinu says:

    Sadly we haven’t seen any goods steps taken by SEBI when LEEL , ILFS, etc failed.

  16. Pritesh Vora says:

    I am planning to invest in a liquid fund and Gold ETF and provide this investment as collateral. Shall I wait till 1st August?

    • Matti says:

      You can invest at any time. While you can pledge now too, the pledge will be reversed by Aug 31st if you do it before Aug 1st.

  17. Dominic Savio says:

    Sir,
    What is the minimum qty to pledge?
    Is to possible to use the pledged margin to buy a stock for delivery?.
    Thanks in advance

  18. Shakun Kothari says:

    Is this anyway connected to Collateral Hair Cut Percentage deduction benefits Or it will remain same

  19. Harish K says:

    Will the haircut remain the same for liquid bees?

  20. Shivaprasad says:

    Hi Venu,

    Thank you for the nice explanation. I wanted to understand the impact of this change on “Good till trigger” orders.
    Can you please explain thsi.

  21. Venkatasubramani P says:

    Thanks for the update. Please allow to pledge MF also with haircut. 50% Cash 50% security should be good.

  22. Adarsh says:

    NRIs can get MARGIN in doing pledge?

  23. Kiran Kumar says:

    Are you going to allow Sovereign Gold Bonds as Collateral?

    If not kindly allow SGB as collateral. It’s long pending request.

  24. Smit says:

    When will pledge against Equity Mutual funds will be reality ? ETF are good instruments, but the spread between NAV and the trading price makes it less effective.

  25. Shyamal says:

    For existing open position against collaterals of existing stocks, how the margin requirement will be monitored during switching over process of custody of stocks from broker’s account to client’s demat account. It may not be possible for clients to arrange for full margin for open positions in the transition.

  26. Sanjeev Khemani says:

    Hi,

    1. In the extremely unlikely scenario of a broker default, will my pledged shares remain safe as long my balances are clear ?
    2. Can we also have the link of Sebi circular(s) to this effect ?

  27. Vandana says:

    The cost of pledge is high it should get reduced once APIs are developed.
    Moreover the the facility of selling pledged security should be given so that the client can use that money to fund delivery obligations arising from some f&o position

  28. Narender says:

    What are the pledge charges ?
    If I will pledge my liquid funds.

  29. SOURENDRA KUMAR DEY says:

    CL BR5462 When Bracket order will be enable?

  30. Pankaj says:

    Is it have anything to do with CNC orders?
    I’ve purchased shares of a company on BSE for long time holding. What will I have to do while selling it?
    Please guide.

  31. PRADIP BHASKAR GUPTE says:

    User code QX9250
    When POA is given why separate pledge? Brokers can give margin after allowing haircut

  32. Ashish says:

    I do not want to pledge any share but will maintain sufficient fund balance instead. Will this be possible?

  33. Sunil Gathani says:

    This may be a good implemets.

    But i think trade volume will be reduced or it will take more time to increase trades once the limit is over.

  34. MAHESH KUMAR VERMA says:

    Dear Sir
    I wish to know if I have sufficient cash balance in my Account still I am required to Pledge my holdings. Kindly clear
    Regards

  35. Sachin says:

    Could you please advise on
    1. Options call and put buying inrelation margin amount require to buy premium amount.
    2. Should margin amt require at the time of exit option which is bought earlier.

  36. Archit Agrawal says:

    Sir,
    (a) I have pledge of Bharat Bond and Axis Liquid Fund with CDSL OTP in July-2020. Does it still need to unpledge & pledge to fall in new system
    (b) In new system also, restriction of Rs 2 lac per scrip and Rs 10 Lac/day will remain ?

    • Matti says:

      A) Yes.
      B) No.

      • Archit Agrawal says:

        Thanks.

      • Shrinidhi Rao says:

        Hi,

        I tried to pledge a scrip of more than 3 lac.
        I get an error “Failed to pledge/unpledge: You cannot pledge more than Rs.200000 for the same instrument. You are exceeding it by Rs.100959.4912”.

        Also, if I pledge less than 2 lac, I didnt receive a mail from CDSL to confirm the pledge. Is the new system active?

        • Nakul says:

          Hey, currently, there’s a limit of 2L per scrip and 10L overall per day when you are pledging from your account without a POA. The new pledge system isn’t live yet. SEBI has allowed implementing these changes by 01st September. We are working with CDSL to make it live as soon as possible. You will receive communication once the new system is live.

  37. Karan says:

    If I have open overnight positions (options sold) using my pledged margins in liquid funds, will I have to compulsorily square off my trades during the re-pledging process? What can be done so that there is no loss of business

  38. Suhas Khullar says:

    Why is there a limit of RS 2 lacs per scrip imposed at Zerodha? Will this go away as a part of this change?

  39. yogesh koundal says:

    Sir I want to know that if i have holdings in my demat account, so to sell those holdings do i need to provide the upfront margin in advance from now onwards, as i am holding bajaj finance from last 10 years so its value is big and it’s upfront margin is huge amount.

  40. santosh kumar says:

    pledging charges are one time or we have to pay every month and its 60+gst or there is any other charges?

  41. ANOOGNA SURESH BABU says:

    dividend received for pledged shares has not been credited to my trading account as per your norms
    after how many days will zerodha transfer these amounts from broker account to clients account
    ref

    clienrt id DA6517
    hdfcamc 150 shares pledged
    div amount 28×150=4200 not credited
    kindly clarify

  42. Kishor says:

    Sir, In new system, shares pledged and margin limit created. May I use this margin to buy NIFTY PUT or NIFTY CALL ?
    Please clear my doubt

  43. Preeti says:

    Hi Sir,

    Can you please be kind enough to explain the intraday transactions in ZERODHA post 1st Aug 2020, with steps it will be useful. Also please let us know how much margin do I need to keep and where etc ????

  44. NARENDRA PRATAP SINGH TOMAR says:

    Is intraday leverage will be affected for banknifty option selling
    From 1 august 2020 or later

  45. Ganesh says:

    How long I can use the margin ? and How interest will be calculate or reduce. Is that interest reduce daily basic ?

  46. Ganesh says:

    Interest is only for over night holding or interest is charged for intra day trading as well ?

  47. Melwin says:

    The fee for pledging will continue to remain the same. – Please clarify on this. Saw a news that above 1 lakh it is more charge like 0.5%. Does that mean if I pledge 1CR I have to pay 50K ??

  48. Mani says:

    Can we continue to use Margins from old framework of Equity pledge till End of August (31st Aug 2020) ?

  49. Abhishrk says:

    Will liquidBees and few other liquid mutual funds still considered as 50% cash equivalent now while pledging

  50. Shrinidhi Rao says:

    Hi, is the new system enabled now?
    I jus tried but didn’t receive the mail or OTP to approve the pledge as mentioned in instructions above.

  51. Nitin says:

    Hi Team,

    If i transferred 50k in my account , i get margin immediately. if i buy something in CASH of that amount and sell on T1.
    Currently i am able to do that , will there be any change in that ? or i need to wait to get stocks in my CDSL account ?

    Regards

  52. ronit says:

    does intraday mis product in futures will not be allowed?

    • Matti says:

      This has nothing to do with intraday products but talks about the mechanism for pledging shares. Nothing changes for you.

  53. Amol Potekar says:

    I have buy shares in delivery option Friday 31st July 2020 , I want to sell tomorrow is it allowed?

  54. Vatsal says:

    Is the new pledge system live ?
    Can we start unpledging old securities and re pledging them ?

  55. Ashok says:

    Hi,

    I have unpledged all my shares on Friday 31, July, 2020 and raised new request for pledging today Sunday 2nd, Aug, 2020. However i have not received any link from NSDL for OTP validation.
    Is new system not effective, pls reply.

  56. Sachin says:

    Is new system in place and working?

    • Nakul says:

      Not yet. SEBI has allowed the implementation of the new system by 01st September. We’re working with CDSL to take it live as soon as possible.

      • Shanay says:

        I have placed a pledge request today. Would this request be cancelled or will the pledging occur in the previous method today?

      • Rajesh Mahendran says:

        If that is not the case then the page should have been updated earlier soon after. What about people who have unpledged by seeing your notification . I personally have unpledged more than 15 pledged scripts. If I have to pledge now and repledge when new margin pledge rule comes in. Who will bear all this charges ?

        • AYUSH GUPTA says:

          Exactly…Even i did the Same…I have not taken any position from 31st July and Unpledged all my liquid fund to pledge again!!

          @Zerodha… Do tell us will the repledge will be in new pledge system or not?

          • Rajesh Mahendran says:

            @Ayush I would suggest you to pledge it again. As per zerodha customer care it would take another one week for them to implement it. I have wasted my week trading gain due to this along with unnecessary pledging charges. Pathetic service guys @zerodha. We atleast expect you guys to update the post so that others won’t do the same mistake like us.

  57. Shankar says:

    I request Nithin to post regular updates on the status of implementation of the new system at Zerodha on Zerodha’s Twitter account to avoid inconvenience and additional charges for the clients.

  58. Siddharth Kumar says:

    @all – This post is *not updated*.

    Feature is not live yet. Still it is using old method only and stocks are getting debited from Demat account.

    Please refrain from unpledging and re-pledging to avoid additional charges.

  59. Siddharth Kumar says:

    @Admin – Do we need to repledge Liquid funds as well ? Or this rule is applicable for stocks only?

  60. AYUSH GUPTA says:

    (1)Please guide us..When we can expect the new margin system to go live on zerodha( tentative date at least)

    Actually from 31st July,many of us have not taken any positions just because of new margin System.

    (2) After receiving POA,in how many days It will be effective in our account and how do we know,POA is effective.
    (Since in CDSL Tpin,2lakh per script capping is there, I dont wish to spent Rs 60 every time)

  61. Rajesh Jain says:

    this question is for nifty option writing.
    i am having equity delivery holding of 50 Lac against which i am getting margin of say 40 Lac.
    I am using this margin for Nifty option writing for carry forward position without having any cash balance in my account. generally i sell today and square-off next day and again take new position of Nifty option writing by end of day.

    How new SEBI rule will affect me ?

  62. Essen says:

    In the new system, how the margins required for a naked and covered (on stocks) call going to be different?

  63. HD says:

    I have pledged some mutual fund on august 6 unit and it got debited from my account. Why the new system was not followed?

    • Nakul says:

      We should be live with this by next week. SEBI has permitted the implementation of the new system by 01st September 2020.

  64. Sunil says:

    When will this feature be live?

  65. Manikandan says:

    Thanks for the detailed article.

    Can i leave the pledge for longer duration? Say i have liquid funds used as collateral for 50% and remaining 50% through cash. Will there by any interest for longer duration pledges? or is it mandatory to frequently unpledge post the trade?

    • Nakul says:

      There won’t be any interest as long as there’s no shortfall in the cash component. Also, it isn’t mandatory to unpledge.

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