Margin Trading (MT) is an arrangement whereby an investor purchases securities by borrowing a portion of the purchase value from the authorised broker by using securities in his portfolio as collateral. Since April 1, 2004, SEBI has allowed member brokers to provide margin trading facility to their client in the cash market. Only corporate brokers with net worth of at least Rs. 3 crores would be eligible to participate in Mragin Trading. The brokers interested to provide margin trading facility to their clients have to seek approval from the stock exchange. The broker may use his own funds or borrow from scheduled commercial banks/NBFC regulated by the RBI. The total exposure of a broker shall be within self imposed prudential limits and not exceeding 50% of networth.
The margin arrangement has to be agreed upon between the broker and the client, subject to SEBI Guidelines, 2004. Initial and maintenance margin for the client shall be a minimum of 50% and 40% respectively, to be paid in cash. A broker may liquidate the securities (kept as collateral) if the client fails to deposit the additional margin in the following cases :
- If the client fails to meet the margin call.
- If the client fails to deposit the cheque after the margin call has been made.
- If the cheque deposited by the client has been dishonoured.