National Stock Exchange cracks whip on Prime Securities

The National Stock Exchange may soon categorise Prime Securities as a defaulter. The exchange is in line to take a Rs 100 crore hit, with Prime Securities being unable to pay the exchange margin money owed on certain trades in the derivatives segment, report CNBC-TV18's Sajeet Manghat and Ashmit Kumar.

Also read: Prime Securities standalone Mar '13 sales at Rs -4.39 crore It all started on the December 28, 2012 when the NSE, under directions from Sebi, tightened the rules governing margins. The changed rules pruned the list of securities that can be accepted as collaterals, meaning all brokers had to replace the ineligible securities with either cash, or eligible securities. Sources say that as of January, Prime Securities had not been able to furnish this fresh collateral, and a couple of months ago, the NSE clamped down on the firm by disabling its terminals. Things came to a head on June 27 when long-term options contracts held by Prime Securities expired. At the time of expiry, the firm owed NSE Rs 100 crore in margin money. When Prime Securities was unable to pay up, the NSE stopped the payout from the trades to Prime Securities and its clients. For Prime Securities, this hit hard. The firm had, over a period of time, used the money from the sale of its Deep-In-The-Money options to increase its exposure in a few midcap stocks like Gitanjali Gems and Aanjaneya Lifecare. With midcaps crashing, Gitanjali Gems has lost 68 percent of its value since the start of the year and Aanjaneya Lifecare is down 94 percent. Now experts say that NSE had introduced long-term contracts to cater to the growing demand for long-term hedges. But Deep-In-The-Money contracts have a 110 percent margin requirement and with NSE now facing one of the largest settlement claims ever, it will have tighten the screws. JR Varma, former whole-time member, Sebi says, "A system where the exchange money is on line provides natural incentives for the exchanges to be as cautious as required and I think so far the process has worked. You know in the last 12 years we have had derivaties. The exchanges have always ensured that settlement happens smoothly." But Prime Securities has a tough road ahead of it. Its move to challenge Sebi’s decision to hold up client payments in the securities appellate tribunal has failed. The NSE is taking steps to declare Prime Securities a defaulter and may even use bank guarantees furnished by the broker to recover its dues. Sebi has begun an investigation into all the transactions in midcap stocks conducted by the company to see if there is any nexus between the company and its clients.