Early Pay-in (EPI) Mechanism and How It Affects Your Trades
The Indian market regulator, SEBI, implements various mechanisms to prevent market manipulation and ensure fair play for everyone involved. One such mechanism is early pay-in or EPI, which primarily applies to brokers but can indirectly affect investors like you.
In this blog, we will explain this mechanism, how it affects you as an investor and how you can stay informed and avoid any unintended consequences that may arise due to EPI.
What is Early Pay-in (EPI) Mechanism?
When buying and selling stocks, you can do two types of trades: Intraday (Where you buy and sell the stocks within the same day itself) and Delivery (Where shares are kept in your demat holdings and settled on a T+1 basis).
For delivery trades, when selling stocks from your holdings, your broker needs to verify the sale of your shares with CDSL. He then gets them cleared for settlement with the clearing corporation after getting confirmation from the exchange that you have traded them. This whole process takes T+1 day to complete.
Your broker can block those shares for settlement in your demat account on the trading day (T Day) itself. The broker can then initiate an early settlement of the shares with the clearing corporation. This mechanism of blocking of shares by the broker with CDSL in the client’s demat account for sell trade is called as Early Pay-in or EPI, since the instruction for blocking of securities in the client’s demat account is irrevocable, the Clearing corporation provides the margin benefit to the client which is known as EPI benefit/ Margin.
After EPI is done the broker can provide a margin up to 80% of the sale proceeds to your account. This margin can be used for trading purposes in both cash & derivative segments. Earlier, the EPI process used to take a long time to settle, and the margin was added to your trading account in multiple batches a few hours after all stakeholders had confirmed the trade.
At Share.Market we have introduced faster processing of EPI that allows your account to be credited with the EPI margin within 5 minutes of execution of the sell order in delivery mode, allowing you to quickly use the margin for other trades and avoid missing market opportunities. This is just the first step towards making the process even faster in the future.
As a user, what do you need to know?
Although the EPI process brings many benefits to you as a user, there are some cases that you need to know about to avoid any issues. Let us discuss each of them in detail-
Case 1:
Suppose you sell shares from your holdings and later try to close the position by buying back the shares again during the same trading session without sufficient margin. In that case, your order will get rejected because you only have 80% of the sale amount in your account as a margin.
Here’s an example to illustrate this:
Let’s say you sell 100 shares of Bharti Airtel from your holdings at ₹1000 per share. Through the EPI mechanism, you receive 80% of the amount as margin, which is ₹80,000, in your account. However, if you attempt to square off this trade by buying back the shares again, your order will get rejected. This is because squaring off the position would require the full amount, in this case, ₹1 lakh (assuming you buy back the shares at the same price).
To make up for this deficit of ₹20,000 in your account, you must add funds to your trading account, or your order will get rejected due to insufficient margin. You also have the option to buy back the shares with the 80% amount that has been credited to you as a margin, i.e. 80 shares with ₹80000.
It’s important to note that the above trades will be treated as intraday by the exchange, the depository, and us. Therefore, you may not incur any DP charges and will be billed as per intraday trading charges.
Case 2:
In the case of BTST(Buy Today, Sell Tomorrow) trades, you will not receive any EPI benefit. This is because when you initiate a BTST trade, your transactions actually get settled on a T+1 basis. So you are selling the shares that have not yet been credited to your demat account.
Hence, the broker will not provide the EPI facility for such trades, and you will not receive the 80% margin of the sale value right away. You will instead receive 100% of the funds on the next settlement day.
Let us understand this with the help of an example. You buy 100 shares of XYZ company on Monday and plan to sell them the next day i.e Tuesday. Although you initiated the sale order on Tuesday, the final settlement of funds will take one more day i.e. Wednesday. Since you are yet to receive the shares in your Demat account and have sold the shares, the broker will not provide EPI benefits.
Instead, you will receive the total sale value of those 100 shares on Wednesday when the settlement is complete.(After deducing all taxes and charges applicable)
Note: For stocks in the T2T category, you cannot initiate any BTST transactions.
Conclusion
By understanding EPI and its limitations, you can leverage its advantages for smoother and more informed investment decisions. As we continuously strive to improve your experience, stay tuned for further advancements in our EPI process.
We encourage you to consult our resources and support team for any further clarification or assistance. Happy trading!