The proposal, which has been under discussion with market participants for several months, is expected to be released as a consultation paper shortly, according to people familiar with the matter
The Securities and Exchange Board of India (SEBI) may soon seek public comments on a proposal to replace the existing flat 20 per cent upfront margin requirement for cash market trades with a risk-based framework, a move aimed at improving liquidity and encouraging greater participation in the equity cash segment.consultation paperThe proposal, which has been under discussion with market participants for several months, is expected to be released as a consultation paper shortly, according to people familiar with the matter. The proposal would require brokers to collect upfront margins based on the 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 per cent of the trade value.VaR and ELM are risk-based margins calculated by clearing corporations to cover potential market losses. At present, brokers collect a minimum upfront margin of 20 per cent from investors to avoid penalties for margin shortfall. However, for many liquid large-cap stocks, the risk-based margin determined by clearing corporations is lower at around 12.5 per cent. So, investors often have to block more funds than the underlying market risk warrants.“The proposals have been discussed extensively with market participants and almost finalised now,” said one of the persons aware of the discussions. “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 objective is to align client margins with the actual risk determined by clearing corporations while avoiding unnecessary blockage of investor funds, the person said. Another source said that 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 per cent for trades in highly liquid stocks.SEBI is also considering changes to the way stocks are classified based on liquidity. A working group has recommended tightening the 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).Other measuresThe ongoing review is part of SEBI’s broader efforts to deepen the cash equity market. Other measures under discussion include 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. An e-mail sent to SEBI for comments did not elicit a response.Published on July 23, 2026
