The Securities and Exchange Board of India (Sebi) has proposed a revamp of rules governing the margin trading facility (MTF), including changes to the margin framework, to better regulate the rapidly growing segment.
In a consultation paper issued on Thursday, the market regulator recommended expanding the sources of funds available to brokers for offering margin trading. In addition to existing avenues such as bank loans, non-banking financial company (NBFC) borrowings and commercial papers, brokers may be allowed to raise money through non-convertible debentures (NCDs) and other debt instruments.
Sebi has also proposed raising the minimum net-worth requirement for brokers offering MTF from ₹3 crore to ₹5 crore. It also plans to extend eligibility beyond corporate brokers by allowing limited liability partnerships (LLPs) to offer the facility. The deadline for submitting feedback on the paper is 9 July.
MTF allows investors to buy shares by paying only a part of the purchase value, with the broker funding the remaining amount against collateral. The segment has expanded rapidly over the past year. The total MTF book grew 60% year-on-year to ₹1.14 trillion in April 2026, according to a May report by CareEdge Ratings. The National Stock Exchange accounted for more than 96% of total MTF volume.
Mint reported in May that the market regulator was considering lowering margin requirements for certain margin-funded stock trades. A proposal to reduce margins on MTF positions for futures and options (F&O)-eligible stocks where clients use cash collateral for pay-in was discussed and approved by Sebi’s secondary markets advisory committee (SMAC), which left the final decision to the regulator.
Tightening the capital cushion
In the draft paper, Sebi refused to reduce margins for MTF positions where the cash collateral is used as pay-in. “It was observed that the additional margin requirement has been kept to address the wrong-way risk that may arise in cases where the security used as maintenance margin (collateral) is the very same security funded under MTF. As the margin (collateral) and the funded exposure are the same, a decline in the price of that security may erode the value of both the margin (collateral) and the funded stock simultaneously,” the regulator said.
Brokers may now have to keep aside up to twice the minimum net worth required for their core broking operations and other activities and 50% of the broker’s net worth. The remaining net worth may be used for MTF, within the overall exposure limit of 5.5 times net worth. This differs from the current rules, which let brokers set their own caps based on their borrowed funds and 50% of their net worth.
The consultation paper also proposes simplifying how brokers handle collateral. Any collateral that is already accepted in the regular cash market would now be valid for MTF transactions as well. Additionally, when investors sell shares early (early pay-in), the proceeds from that sale could immediately be used as collateral for new MTF positions, provided any existing margin debts are settled first.
30-day grace period
Sebi has also addressed what happens when a stock loses its eligibility after an investor has already taken an MTF position. If a funded stock or its collateral gets removed from the approved list, enters ‘trade-to-trade’ status, or faces new trading restrictions, brokers and investors will get a 30-day window to rebalance the portfolio.
“Where a security being funded or given as collateral by a client under MTF moves out of the group I category, or is shifted to the trade-for-trade category, or is suspended from normal market trading for any reason, a rebalancing period of 30 days may be provided to the stock broker, to ensure compliance with the regulatory requirement,” the regulator said in the paper.
Group 1 stocks are highly liquid and actively traded, making them eligible for lower margins, collateral purposes, and MTF funding. The trade-to-trade category includes stocks placed in a surveillance category where every trade must result in compulsory delivery, meaning intraday netting or speculative squaring off is not allowed.
Streamlining operations
The regulator has also proposed recognising certain client-level concentration breaches as “passive breaches”. Such breaches may arise when a broker’s overall MTF exposure shrinks, causing an otherwise compliant client to cross the 10% exposure threshold. Brokers would have 30 days to bring such exposures back within limits, while restricting any additional funding during the period.
Operational changes form another major part of the review. Sebi has proposed allowing fungibility between normal and MTF client ledgers, enabling transfer of excess funds and securities between the two accounts. Excess cash collateral parked in MTF accounts may also become eligible for periodic running account settlement.
The regulator has also suggested standardising the rights and obligations document governing margin trading by creating a common format across stock exchanges.
On reporting requirements, brokers may be required to report MTF positions to exchanges before clearing corporation pay-in timelines on a T+1 basis, allowing exchanges to consolidate exposures across the industry.
The regulator said in the draft paper that it plans to review the group classification of securities for the purpose of margin, collateral, MTF and the securities lending and borrowing mechanism (SLBM). MTF is currently only available for shares and units of equity exchange-traded funds (ETFs) that are classified as ‘Group I security’. “A consultation paper in this regard will be issued separately,” Sebi said.
