As a common investor, it's crucial to be aware of the various rules and regulations governing your trading activities, especially when it comes to margin requirements. The recent arbitration case between an investor, Deepak Agrawal, and his broker, ICICI Securities, serves as a valuable lesson for all investors. He has posted it on his
LinkedIn account. The case revolved around the broker's handling of margin requirements and the subsequent penalties charged to the investor.
Let's break down the key takeaways from this case:
1. Mandatory margin reporting: Brokers are required to report the details of margins collected from their clients to the exchange (in this case, the Multi Commodity Exchange or MCX). This includes various types of margins, such as initial margin, extreme loss margin, additional margin, special margin, tender period margin, delivery period margin, and mark-to-market (MTM) margin.
2. Upfront margin collection: Brokers must collect the initial margin and extreme loss margin from clients upfront, before executing the trade. For other types of margins, brokers have T+two days (two working days after the trade) to collect them from the clients.
3. Penalty on margin shortfall: If a client's trading account does not have enough funds to cover the required margin, it is considered a margin shortfall. Brokers are allowed to charge a penalty on this shortfall, which is known as a margin penalty or margin shortfall penalty.
4. Penalty calculation: The penalty is calculated based on the shortfall amount, not on the entire margin requirement. For example, if the shortfall is less than Rs1 lakh and less than 10% of the applicable margin, the penalty is 0.5%. If the shortfall is Rs1 lakh or more, or 10% or more of the applicable margin, the penalty is 1%.
5. GST on penalties: The broker is also required to charge goods and services tax (GST) on the margin penalty amount.
In the case of Deepak Agrawal, the arbitrator found that the broker, ICICI Securities, had charged the penalty (interest) on the entire margin requirement, instead of just the shortfall amount. The arbitrator ordered the broker to refund the excess penalty charged of Rs1,69,973, which was calculated on 50% of the margin shortfall. ICICI Securities charged GST on the entire penalty amount instead of just the portion related to the shortfall. The arbitrator ordered the broker to refund Rs30,595, which was 50% of the total GST charged of Rs61,190.
This case highlights the importance of understanding the rules and regulations governing margin requirements and the penalties associated with shortfalls. As a common investor, you should:
1. Familiarise yourself with the margin requirements and collection timelines set by the exchanges.
2. Ensure that your broker is collecting the margins as per the prescribed guidelines and not charging excessive penalties.
3. Monitor your trading account regularly to avoid margin shortfalls and the associated penalties.
4. Seek clarification from your broker if you have any doubts or concerns regarding the margin-related charges.
Remember, a good broker should have strong work ethics, excellent communication skills and provide outstanding customer support. If you feel that your broker is not meeting these standards, you may consider switching to a more reliable and trustworthy service-provider.
By being aware of your rights and the industry's best practices, you can protect yourself from unfair margin-related practices and maintain a healthy trading relationship with your broker.
We have contacted ICICI Securities to get their views on the case. We will update this article with their response if and when we get it.
