politics · 2026-07-24
SEBI May Cut Cash Market Margin to ~12.5%
Photo: Niyantha Shekhar / Wikimedia (CC BY 2.0)
SEBI plans to replace the flat 20% upfront margin for cash trades with a risk-based system using clearing corp assessments.For many liquid large-caps, risk-based margins are ~12.5%, so the current 20% rule blocks more funds than the risk warrants.Retail traders and brokers face risk from margin shortfalls on liquid stocks.
How would the new margin get calculated?
Brokers would collect the lower of two figures: either the clearing corporation's risk-based margin (VaR plus extreme loss margin) or 20% of trade value. For liquid large-caps like Reliance or HDFC Bank, this typically comes to ~12.5%.
What is VaR in this context?
Value at Risk, or VaR, is the estimated maximum loss on a stock position over one trading day at a 99% confidence level. For a liquid stock like Infosys, clearing corps might set VaR at ~10% of trade value, reflecting its lower price volatility versus a small-cap.
How often do clearing corps recalculate?
Clearing corporations recalculate VaR and extreme loss margins daily using rolling price data, typically a six-month lookback. If a stock's volatility spikes, say after an earnings surprise at Tata Motors, the margin can jump within a day.
Does the 20% floor still apply to mid-cap trades?
Yes. For mid-cap and illiquid stocks, risk-based margins often exceed 20%, so the 20% floor becomes irrelevant. The proposal mainly benefits trades in Group I securities, which face the highest liquidity standards and thus the lowest risk-based assessments.
Why did SEBI stick with 20% since 2005?
The flat 20% rule dates to 2005, before India's market cap grew ~15x and electronic trading dominated. The framework stayed unchanged despite a 2020 peak when daily cash turnover hit ₹70K Cr, making the rigid threshold increasingly mismatched to actual risk.
What stocks qualify as Group I under new rules?
A SEBI working group wants tighter Group I criteria: higher minimum trading frequency and lower impact cost thresholds. Only stocks meeting these stricter liquidity tests would qualify for the lowest margins and the margin trading facility.
How big is the 10-15% margin reduction in rupee?
SEBI's preliminary data from the top 10 brokers suggests ~10-15% lower upfront collection on highly liquid stocks. At ₹50K Cr average daily cash turnover, even a 10% reduction frees ~₹5K Cr in blocked investor funds daily.
Could this shift volume from derivatives to cash?
Possibly. Derivatives already dominate with ~90% of equity market turnover. Lower cash margins reduce the cost gap between futures (already SPAN-margined) and spot buying, potentially drawing some retail flow back to delivery-based investing.
Who gains most from lower upfront margins?
Retail investors in liquid stocks gain directly through lower fund blockage. A client buying ₹10L of Nifty 50 shares would block ~₹1.25L instead of ₹2L, freeing ₹75K for other trades. Brokers also gain as penalty risks from margin shortfall disputes drop.
Do MTF limits also change with stock?
Yes. The margin trading facility, or MTF, eligibility is tied to Group I status. Tighter criteria would shrink the MTF-eligible universe, forcing brokers to restrict leveraged cash trading to a smaller pool of qualifying securities.
How does early pay-in give margin relief?
Early pay-in lets brokers submit client funds before settlement, typically T+1, reducing settlement risk. SEBI may extend this relief so brokers collecting early pay-in need lower upfront margins, cutting double-blocking of investor money.
Which brokers pushed hardest for this reform?
The top 10 brokers by client base, including Zerodha and ICICI Direct, lobbied for this change. Their data showing 10-15% margin reduction formed the basis of SEBI's preliminary assessment, per sources familiar with the discussions.
Source: thehindubusinessline.com