What’s the risk that could’ve blown up the securities market, according to Nithin Kamath

From September 1, 2022, the Securities and Exchange Board of India-mandated, 100 percent upfront margin rule had come into effect. That is, whatever the margin requirement was required to place a trade, that margin would need to be collected before the trade was placed.

Earlier, brokers used to allow margin lending which increased the leverage per trade.

For example, if to buy a Rs 100 security, the margin requirement was Rs 20, which allows for 5x leverage, the broker would charge only Rs 2 (effectively loaning the remaining Rs 48) and thus allow 50x leverage. These highly leveraged trades introduced a systemic risk and therefore the market regulator stepped in.

Kamath said, “While it (removing such excessive leverage) probably hurt us as a business in the short term in terms of revenue but (the change helps in the long term).”

He added, “Leverage is really like WMD (weapons of mass destruction) in the stock market. It can help a few people make money fast but a majority of the people using leverage actually end up losing money.”

While leverage exposes investors to high amounts of risk, it affects the broking business too.

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Kamath said, “The problem with leverage is that people who use it become inactive after a while. The higher the leverage, the faster a person becomes inactive (in the market). This is because they lose money faster and they stop participating.”

He said that, as a broker, they would want participation in the domestic stock market to go up. “That is the long-term vision. In the short term, it hits your revenue. But in the long run, the odds of your customer doing well increase with lesser leverage (available) which is in a way beneficial for the business,” he said.