Mumbai, Dec. 28 (PTI): In an effort to provide liquidity and flexibility in funding stock market transactions, the Securities and Exchange Board of India today mooted a proposal to set up “limited purpose bank” for margins trading and securities lending.
“People interested in lending the funds and securities to the market may deposit them with the bank and borrowers may borrow from this independent entity having a nation-wide presence,” Sebi said in its discussion paper released here. “Margin trading is transaction in the securities market with the borrowed resource funds or securities,” the paper said.
“This will help avoid a nexus between the lender of the funds and securities brokers and also the issuer companies. The total quantum of the funds and securities lent will be known to the market at any point in time,” it added. The risk management function would become effective and help to maintain audit trail with help of this model, it said.
There are many business models for lending funds like financing by brokers and clearing corporations or exchanges but “the banking model has the advantage of keeping track of who is lending the funds and securities in the market and to what extent,” Sebi said.
“In the proposed systems, at no point in time, money or securities lending will be clubbed with the actual settlement of the normal trading on the exchanges, before or after the execution,” it said, adding, “these will essentially be independent activities and nobody will be able to lend against his or her future proceeds.”
Sebi said building a nation-wide bank would require both money and time which could be arranged through co-ordinated efforts of the market participants.The limited purpose bank may lend the funds and securities through the clearing corporation exchange with facility of online trading platform.
As part of capital market reforms, the deferral products, such as automated lending and borrowing mechanism were banned and compulsory rolling settlement on T+5 basis was introduced in July 2001.
“The market participants had then apprehended that these reforms may affect the market liquidity. It was, therefore, felt necessary to provide the facility of margin trading in a more explicit and organised way,” it said, adding “it was considered necessary to make available a line of credit to them from banks for margin trading.”
The paper said market participants have suggested the RBI guidelines, on lending to brokers, need to be clear on how to avoid nexus between interconnected stock-broking entities or stock brokers. The current limit on lending of Rs 10 lakh and Rs 20 lakh for demat securities for an individual should be increased, the participants pointed out.