InvestorQ : Can you tell me what this higher F&O margin for pledged stocks means and how it will impact me since I am holding Adani Power futures?
prachi Patwardhan made post

Can you tell me what this higher F&O margin for pledged stocks means and how it will impact me since I am holding Adani Power futures?

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2 years ago
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As a means of risk management and to prevent unnecessary volatility in the stock futures market, the regulator has made decided to enhance the initial margin in stock futures to 35% in case the promoter pledged shares exceeds 25% of the total share capital. Please not that the promoter pledge has to be more than 25% of the total share capital and not the promoter shareholding. That could be confusion for many traders like you so this should be clearly understood.

The idea here is that companies that have a large quantum of shares pledged by promoters are already risky because if promoters run into cash flow problems (as we have seen many instances in the last 1 year), then it creates unnecessary volatility and losses to the investors. In addition, the SEBI has also stipulated additional margins in two more cases; where the trader concentration is too high and where the gap between high/low in the recent past is more than 40%. But let me focus on the impact of the pledged shares more at this point of time.

Take the case of a company like Adani Power. If you buy Adani Power in the futures market, then you currently pay margins at the rate of around 13%. However, Adani power already has well over 25% of its total equity pledged as promoter stake. Effective November 01st, all fresh positions in Adani Power stock futures will attract higher margins at the rate of 35%. That means you will now require nearly 3 times margins for each lot of Adani Power that you buy or sell in the futures market. It will also have another implication. A lot of traders may prefer to shift to buying calls and puts instead of buying or selling futures. However, since writing futures will attract higher margins, writers will demand higher premiums to compensate for the higher risk. That will move the pricing of these options higher.

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