Understanding Margin Against Shares: How Does It Work?

Margin Against Shares (MAS) is a way to unlock the value of your existing investments without having to sell them. It offers a convenient route to raise funds for trading or short-term financial needs. With proper understanding and responsible usage, this facility can help investors and traders make the most of their portfolio, while still retaining ownership of their securities.

Margin against shares (MAS) refers to a facility where you can pledge your equity shares or other eligible securities to avail a loan or trading margin. Instead of selling your investments, you use them as collateral to get access to funds. This facility is offered by banks and stockbrokers, primarily for trading or short-term liquidity needs.

The lender assigns a loan value based on the market value of the pledged shares and the applicable haircut (margin). These funds can typically be used for investing in equities, derivatives, or to meet urgent financial needs, subject to lender terms and regulatory conditions.

Understanding how MAS functions can help you use the facility efficiently while keeping risk under control. The process typically involves a few key steps:

1. Eligibility and Account Setup

You need a demat account and a trading account with a broker offering margin against shares. Some banks also offer MAS facilities linked to your demat holdings.

2. Pledging Securities

Eligible securities must be pledged through an authorised process. Once pledged, these holdings appear as ‘pledged’ in your demat statement. You continue to retain ownership and earn benefits like dividends.

3. Margin Calculation

The collateral value is calculated after applying a haircut. The haircut depends on the volatility and liquidity of the security. Regulatory guidelines, such as those from SEBI, also influence margin rates.

4. Usage of Margin

The margin can be used to trade in equity, F&O segments, or to avail an overdraft, depending on the terms of the MAS facility.

5. Monitoring and Margin Calls

If the value of pledged shares falls due to market fluctuations, you may face a margin shortfall. This could trigger a margin call requiring additional collateral or cash infusion.

6. Release of Pledge

Once dues are cleared, the pledged shares can be unpledged and returned to your demat account.

When you opt for Margin Against Shares (MAS), the margin amount you receive depends on multiple dynamic factors. Understanding these can help you maximize margin benefits and manage risk better:

1. Approved List of Securities

Only shares included in the broker or exchange’s approved list are eligible for margin funding. Stocks with high liquidity and stable price movements are typically preferred.

2. Haircut Percentage

A haircut is the deduction applied to the market value of pledged shares to cover risk. For example, if the haircut is 20%, a stock worth ₹1,00,000 will offer a margin of ₹80,000.

• Volatile stocks have higher haircuts.

• Stable, blue-chip stocks generally have lower haircuts.
  

3. Market Price Fluctuations

Since margins are based on real-time market prices, any decline in share value reduces the margin available. This may trigger a margin call if the shortfall is significant.

4. Client Risk Profile

Some brokers assess an investor’s risk profile and set exposure limits accordingly, which may affect how much margin is extended.

5. Broker’s Internal Policies

Brokers may apply additional haircuts or restrictions beyond SEBI norms based on their risk assessment and internal guidelines.

6. Type of Securities

Equity shares are common, but mutual fund units, ETFs, bonds, etc., may also be accepted depending on the broker. Margin benefits vary across asset types.

7. Regulatory Guidelines

SEBI and exchanges like NSE/BSE regularly update rules regarding margin trading, including eligible securities and haircut norms, which directly impact margin availability.

While Margin Against Shares (MAS) offers added flexibility and liquidity, it comes with certain costs and important considerations that investors should evaluate before opting in:

1. Interest Charges

Brokers usually levy interest on the borrowed margin amount. This interest is calculated on a daily basis and can significantly affect returns if positions are held for longer durations.

2. Pledging Charges

Depositories like NSDL/CDSL apply a pledging fee, which is usually passed on to the investor. This is a one-time cost per transaction when you pledge or unpledge securities.

3. Exposure Limits

Not all the value of your pledged shares is available as margin. A haircut is applied to safeguard against price fluctuations, which reduces the usable margin amount.

4. Margin Shortfall Risk

If the value of pledged shares drops due to market volatility, the margin may fall below required levels. This can lead to a margin call, and failure to meet it may result in forced square-off of positions.

5. Limited to Approved Stocks

Only shares from the broker's approved list are accepted for margin funding. Stocks that are illiquid or volatile are typically excluded.

6. No Ownership Transfer

Though the shares remain in your Demat account, they are marked as pledged and can't be sold until unpledged. This reduces your flexibility during sudden market opportunities.

7. Exit Barriers

Exiting a pledged position might involve multiple steps such as unpledging and settling dues, which can take time and may not be instant.

The list of securities eligible for MAS or LAS may vary by institution, but typically includes:

• Listed equity shares
  

• Mutual fund units (equity/debt)
  

• Exchange-Traded Funds (ETFs)
  

• Government securities (G-Secs)
  

• Bonds and debentures

Eligibility is subject to haircut rates, liquidity, and creditworthiness of the securities.

Several factors determine how much margin or loan you can avail against your securities. Being aware of the following can help you make informed decisions:

• Haircut percentage: Generally ranges from 15% to 50%, depending on the security.

• Security type: Highly liquid and stable securities attract lower haircuts.

• Loan-to-Value (LTV) ratio: This indicates the maximum amount you can borrow against the security’s market value.

• Regulatory framework: SEBI and RBI have guidelines on LTV, disclosure, and margin collection.

While MAS provides easy access to funds, it might also come with certain risks. The following are some of the benefits and risks involved in MAS:

Benefits:

• No need to sell your investments
  

• Quick access to liquidity
  

• Interest charged only on utilised amount (in OD model)
  

• Continued ownership of pledged securities
  

Limitations:

• Market fluctuations can lead to margin calls
  

• Not all securities are accepted
  

• Over-leveraging can increase financial risk
  

• Interest and fees may vary across providers

Risk Management Best Practices

While Margin Against Shares (MAS) can provide short-term liquidity and trading power, it is important to manage the associated risks wisely. Here are some best practices to consider:

• Monitor pledged securities regularly: Keep an eye on the market value of your pledged shares to avoid sudden margin calls.
  

• Understand margin call protocols: Know what happens if the value drops and how much time you'll get to meet the shortfall.
  

• Avoid over-leveraging: Borrow only what you truly need. Overextending your margin can lead to forced liquidation of assets.
  

• Diversify pledged holdings: Avoid pledging highly volatile or illiquid stocks if possible.
  

• Review lender terms frequently: Terms regarding interest, haircut percentages, and eligible securities may change over time.
  

• Keep a cash buffer: Maintain some liquidity to respond quickly to market fluctuations or margin calls.
  

Note: Risk management is crucial, especially in volatile market conditions. Always assess your repayment ability before availing margin-based facilities.

In India, pledging and margin processes are governed by SEBI regulations and executed via NSDL or CDSL platforms. The repledging framework, margin reporting, and haircut norms are part of SEBI’s risk management system.

All pledging must be done through an OTP-based authentication to prevent misuse. Regular disclosures and proper margin utilisation are required by brokers and lending institutions.

Several factors determine how much margin or loan you can avail against your securities. Being aware of the following can help you make informed decisions:

• Haircut percentage: Generally ranges from 15% to 50%, depending on the security.

• Security type: Highly liquid and stable securities attract lower haircuts.

• Loan-to-Value (LTV) ratio: This indicates the maximum amount you can borrow against the security’s market value.

• Regulatory framework: SEBI and RBI have guidelines on LTV, disclosure, and margin collection.

Margin against shares offers a way to unlock liquidity without divesting your investments. It is commonly used in trading or short-term borrowing scenarios. However, it involves risk due to market-linked valuations and should be used with awareness of its structure, costs, and compliance requirements.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

https://www.sebi.gov.in/legal/circulars/may-2024/norms-for-acceptable-collaterals-and-exposure-of-clearing-corporations_83650.html