The Securities and Exchange Board of India is considering a comprehensive proposal to replace the existing flat 20% upfront margin requirement for cash market trades with a risk-based framework, marking a significant shift from current practices. According to The Hindu BusinessLine, the proposal has been under discussion with market participants for several months and is expected to be released as a consultation paper shortly. Under the new framework, brokers would collect upfront margins based on risk assessed by clearing corporations, rather than a set threshold. In practice, clients would pay whichever is lower - the margin prescribed by the clearing corporation (comprising value at risk, or VaR, and extreme loss margin, or ELM), or 20% of the trade value. The regulator's preliminary assessment based on data from the top 10 brokers showed that the risk-based framework could reduce upfront margin collected by around 10-15% for trades in highly liquid stocks.
Under the existing framework, when an investor sells shares through the EPI mechanism, the trade is cleared by the clearing corporation on the trade day itself, eliminating settlement risk and releasing the sell-side margin. However, if the investor immediately uses those sale proceeds to buy another stock on the same day, brokers are still required to fund the applicable upfront margin of around 20% depending on the stock. This means that even though an investor may have ₹100 worth of sale proceeds available, ₹20 has to be blocked by the broker using his own trading limits with the clearing corporation. The exchange settles trades through clearing corporations, which guarantee settlement of all trades done on regulated exchanges. The two clearing corporations for equities are NSE's NSE Clearing Ltd (NCL) and BSE's Indian Clearing Corporation Ltd (ICCL), with NCL being the preferred platform.
Market participants believe the proposed changes could significantly encourage greater participation in the cash segment, an area Sebi has been trying to strengthen amid concerns over excessive retail activity in derivatives. "The proposals have been discussed extensively with market participants and almost finalised now," said one person aware of the discussions, speaking on condition of anonymity. "The minimum requirement of 20 percent did not make sense for an investor taking lower risk, and its removal has been an industry ask for long," the person added. The objective is to align client margins with the actual risk determined by clearing corporations while avoiding unnecessary blockage of investor funds. Currently, for many liquid large-cap stocks, the risk-based margin determined by clearing corporations is lower at around 12.5% compared to the flat 20% requirement, meaning investors often have to block more funds than the underlying market risk warrants.
The EPI framework, revised in October 2024, currently allows investors to use proceeds on the same day instead of the normal delivery cycle where settlement happens on a trade plus one day basis (T+1). Before the change, investors could access only 80% of sale proceeds on the trade day, with the remaining 20% becoming available after settlement on the following day. The revised framework also allows traders to deploy intraday profits immediately instead of waiting until the next trading session. Additionally, SEBI is considering changes to the way stocks are classified based on liquidity, with a working group recommending tightening eligibility criteria for the most liquid Group I securities by increasing the minimum trading frequency requirement and lowering the permissible impact cost threshold. The revised classification will also determine the universe of stocks eligible for the margin trading facility (MTF).
The proposal comes as Sebi continues to roll out measures aimed at deepening the cash equities market amid a slowdown in activity. Average daily cash market turnover on the National Stock Exchange fell 7% year-on-year to ₹1.05 trillion in FY26, with the index options average daily turnover also declining by a similar extent to ₹50,467 crore after tightening measures by Sebi since November 2024. The ongoing review is part of SEBI's broader efforts to deepen the cash equity market, with other measures under discussion including extending margin relief through the early pay-in mechanism, expanding the list of stocks eligible for short selling and strengthening the stock lending and borrowing mechanism (SLBM). The existing framework for stock classification and cash market margining has remained largely unchanged since 2005, despite the significant expansion of India's equity markets over the past two decades.
