Zerodha's co-founder and CEO Nithin Kamath has issued a warning about margin trading facility (MTF) risks amid recent stock market volatility in Korea. According to reports from Business Standard, Kamath highlighted that rapidly expanding MTF books in India could aggravate market corrections through margin calls and forced selling. The MTF book has grown between five and six times in about three years, expanding from ₹24,920 crore in FY23 to ₹1.3 lakh crore today. As noted by Shrey Jain, CEO of SAS Online, this growth has been driven by higher retail participation, increased broker offerings, and greater product awareness.
Unlike overseas markets, India's regulatory framework has built extensive safeguards to prevent leverage-driven volatility. As reported by The Economic Times, Sebi's decision to implement 100% upfront collection of futures margins and option premiums, along with peak-margin regulations, has largely eliminated unchecked leverage. The increase in index derivatives contract sizes to ₹15-20 lakh has raised capital requirements and created higher entry barriers for retail participants. Single-stock derivatives are subject to exchange-monitored Market Wide Position Limits (MWPL), with fresh positions restricted once open interest approaches prescribed thresholds. Clearing corporations continuously assess margin requirements in real time using portfolio SPAN risk models, generating immediate alerts when market movements erode collateral buffers.
Smallcap and midcap stocks pose particular risks during market stress due to their increased volatility and potential for hitting lower circuits. According to Trivesh D, COO of Tradejini, these stocks can prevent investors from exiting their positions when prices fall. Stocks outside the futures and options segment tend to be relatively less liquid during market stress, prompting brokers to apply more conservative funding norms. As reported by Tejas Khoday, co-founder and CEO of FYERS, MTF magnifies both gains and losses, with the effect depending on the margin prescribed by brokers. Investors must provide additional margin within stipulated periods, and brokers may liquidate positions if margin shortfalls are not met.
Under MTF, investors pay part of the purchase value while brokers fund the balance, requiring margin of about 25% or more depending on the stock. According to Vikas Singhania, CEO of TradeSmart, the principal cost is interest charged on the broker-funded amount, which is calculated daily even if stock prices remain unchanged. Interest costs erode returns over longer holding periods, raising the price that stocks must reach before investors can make profits. Additional costs include brokerage, statutory charges, pledge-related charges, and possible margin-shortfall charges, as reported by Business Standard.
Unlike overseas markets, India's MTF operates through decentralised broker-client relationships with positions monitored and liquidated individually based on margin requirements. As reported by The Economic Times, this structure prevents the mechanical feedback loops seen in centrally managed leveraged ETFs that require daily rebalancing. The surge in retail participation, reflected in 13.1 crore investors (NSE) and over 23.16 crore demat accounts, has transformed India's equity landscape, making the growing popularity of MTF hardly surprising. Sebi's rationalised weekly options expiries with exchanges permitted to offer such contracts on only one benchmark index has reduced speculative expiry-day activity intensity. Multiple layers of risk monitoring embedded within the market infrastructure ensure leverage remains transparent, well-collateralised and dispersed, significantly reducing the risk of disorderly deleveraging cycles.
