I wanted to know that how things work behind the pledging. Zerodha accepts pledging request through console and moves the security from our demat account. Other brokers perform pledging on the basis of mails received from the client or sometimes all securities are automatically pledged and margin added to my account.
Why doesn’t Zerodha follow the way other brokers are doing?
Firstly there is a huge revamp planned in the way pledging happens currently in India. It was supposed to be implemented from June 1st, but due to the lockdown is now extended to Aug 1st 2020. Check this original circular and this recent one with the extension.
Right from day one of our business, when clients have pledged, we have moved shares from client Demat to our collateral account and from there to Clearing corporation for margins. We did this, even though this was a costlier route since our clients had to bear DP transaction charges (Rs. 60 charged for pledging) when moving the security, because it was the most compliant way of taking a pledge. Just not us, there are many other large online brokers who have followed a similar method of pledging.
But yes, there are many other brokers who provide margins even when the security is in your demat account. The idea with such offerings typically is that if margin is easily available, the chances of a client trading is much higher. Some brokers add margins to the trading account even before requesting to pledge to induce customers to trade. When the security is lying in the customer account, the broker is essentially funding the margins offered. There is always a cost to lend money, so this means that the broker is ready to bear the funding cost as he knows the opportunity to generate brokerage revenue is higher than the cost of money.
Btw, when a security is lying with clearing corporation, the broker doesn’t have to fund the customer unless the customer doesn’t bring in a minimum of 50% of the margin required to trade in form of cash. You can check this post to learn more on how pledging works.
Until now there was no rule that explicitly prohibited brokers from considering stocks sitting in client demat account as margins, but SEBI has now clearly disallowed this from June 1st until Aug 1st when the new way of pledging goes live. Check this excerpt from the SEBI circular:
@nithin Clause 6 of the original circular says that “the complete trail of such re-pledge shall be reflected in the demat account of the pledgor”. Is this currently available in Zerodha? It not, is there a plan to make such a trail visible in the demat account?
I am confused – you said when client pledges you move shares from client demat account …
So before a client request a pledge …shares remain in your pool account mapping it to each client’s demat account ? because you have POA or edis from a client by default? So technically they are in your pool account but client believes it is in their demat because they see it under their holding.
Read what @nithin said carefully when we buy shares they are credited to the client’s Demat account, and we also get an email, messages from the depository when transactions happen in our account, if shares remained in brokers account we would never have got those messages,
When you buy shares, it sits in your own demat account with a POA to the broker to debit the shares when you sell it. You can login to your CDSL account and see all the shares in your account at any time. We never keep client shares in our pool.
If you pledge these shares, it moves from your demat to us and from there to clearing corporation. If you don’t pledge, it remains in your demat.
Not all brokers follow this way. Some brokers allow you to take margin on shares sitting in your demat without actually moving the shares as pledge - which has to stop from June 1st.
Btw, all new accounts that we have opened from Nov 2019 are without POA. We will soon give an option to old users to move to this route as well. Check this
What does that 0.05% per day interest means? it means if i use 10k from the collateral margin, i’ll pay 0.05% per day on the 10k i used?
also if i want to share the pledged shared, do i have to first unpledge or i can sell directly when i see there’s a good price for the stock and zerodha will automatically unpledge and give the delivery of sold pledged stocks?