India's tighter rules on bank financing are prompting some proprietary traders to find alternative ways to build leveraged equity derivatives positions, including by using shares held by wealthy investors in their networks as collateral. According to reports from Mint, instead of pledging their own shares, the traders arrange to use idle securities held by high-net-worth individuals with surplus shares as collateral in return for a share of the trading profits. For example, a proprietary trader may approach an acquaintance holding ₹10 crore worth of blue-chip shares and offer to generate an additional return from the idle holdings, promising investors a share of the earnings.
The practice has gained relevance after RBI tightened rules governing bank financing for capital-market intermediaries in February 2025. Under the new norms, traders are required to provide 100% collateral, with 50% in cash and 50% in non-cash items, which can then be used as margin. This represents a significant increase from the previous system where a prop trader lacking ₹1 crore in cash or cash equivalents could obtain a ₹1 crore bank guarantee by providing only ₹50 lakh as collateral. The revised rules took effect on 1 July 2025, but bank guarantees typically remain valid for a year, with some guarantees issued before the deadline potentially valid until July 2027.
For prop traders, the appeal is leverage: clients' idle shares can be used as collateral to support larger derivatives positions without tying up their own capital. According to Mint's report, a trader using ₹1 crore worth of shares as margin could support a derivatives position of up to ₹5 crore if the applicable margin requirement is 20%. However, the arrangement also exposes investors to losses if trades go wrong and raises questions over whether it effectively recreates the leverage the RBI sought to curb. As reported by Mint, one prop trader noted that while not many traders have started this practice yet, once bank guarantees expire, many people will begin using this workaround.
The workaround has raised questions over whether private arrangements involving third-party securities could effectively recreate the leverage that RBI's rules were intended to restrict. According to Mint's report, Moin Ladha, Partner at Khaitan & Co, stated that arrangements involving third-party securities to support proprietary trading positions would need to be examined carefully against the applicable collateral and risk-management framework. Akshaya Bhansali, managing partner at Mindspright Legal, suggested that such private arrangements might be considered illegal, as they could be viewed as deliberate circumvention of legal provisions. Debarpita Pande from Trilegal noted that if the holder has not consented to the shares being pledged as security, using those securities for that purpose would present clear issues.
