In response to the recent decline in share prices caused by the critical Hindenburg Research report on the conglomerate, top domestic stock brokers are increasing the margin requirements for individual traders looking to place bets on Adani Group stocks. In addition to the increased exchange-mandated margins that have skyrocketed in the past two days, these businesses are requesting additional cover from customers in order to trade Adani shares.
Market participants who want to use Adani shares as collateral for trading are also being asked to take a bigger cut from the loans’ value. A haircut is a value that a lender assigns to an asset to determine the collateral’s value. These steps are part of brokers’ attempts to reduce risks for clients and for themselves.
“Brokers are asking for extra margins in Adani Group stocks over and above the exchange-mandated margins because of the sharp volatility,” said Jimeet Modi, founder & CEO, of Samco Securities. “Similarly, brokers are applying a bigger haircut for existing margin collateral that has been availed against Adani Group stocks.”
After share prices began to fall, brokers reported that margin requirements for trading Adani stocks had increased on Friday and earlier this week. However, the fastest increase occurred following the intensified sell-off on Wednesday and Thursday.
In addition to the 36% initial margins established by exchanges for trading in Adani Group stocks and derivatives, the majority of broking firms are asking for anywhere from 5% to 25% more funds. As part of their internal risk management, brokers voluntarily collect these additional funds. The exchange’s systems estimated the upfront deposit to be around 20% prior to the stock market crash of the conglomerate. Some brokerages permitted clients to leverage more than five times their pre-crisis investment for Adani stock intraday trades. They now grant a margin of only three times the initial amount.
A leading stock broker said the additional margins on the group’s stocks are aimed at deterring traders from taking wild gambles amid the uncertainty.
More risky collateral
The collateral that is riskier, collapse of Adani shares has also made them riskier as collateral, which has led brokers to lower the value of their pledges when they are used to secure loans. Brokers reduced the amount of Adani stock pledged as collateral for margin by 60-70%, up from 30% before the share prices started to fall.
This means traders would only have a margin exposure of 300 for a pledge of Adani Enterprises NSE -35.00 percent shares worth 1,000, and they would need to bring in additional shares or securities as collateral. The shares are squared off in the event that customers do not bring that in. These margin calls by brokers, according to brokers, were one of the factors that contributed to the sell-off in Adani stocks on Thursday.
“Incrementally, we are only accepting collateral against Adani Ports NSE -11.31 %, ACC NSE -4.74 %, and Ambuja because of the market risks,” Modi stated. Numerous retail brokers are only accepting certain Adani stocks as collateral.
The stocks of the conglomerate should be accepted as collateral by some. On the condition of anonymity, the head of a retail broker stated that stocks that have reached the lowest daily trading limit cannot be used as collateral. Citi and Credit Suisse, two international financial institutions, no longer accept Adani Group securities as collateral for margin loans.
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