SEBI New Margin Rules

SEBI has introduced three major changes in new margin rules, which apply effective from September. Let us try to understand the changes, and how the new margin system affects the capital market.

·       Upfront Margin 

·       Pledge and Un pledge mechanism

·       T+2 day settlement to EOD settlement

Market participants have a different way of approaching the market. Some people are long-term investors, they simply buy and hold.

Some people are short term positional traders and few people are full-time traders.

Apart from this institutional traders have a high-frequency trading setup called scalping.

Most people have an idea about the future margin system but they don’t have an idea about equity margin. Let us try to learn in a simple manner

If a trader places any trade in his terminal in the equity segment, is subject to margins.

Types of Margin:

There are two types of margins collected by the clearing corporation from the broker.

These margins are Value at Risk and Extreme Loss Margin (ELM). Don’t get confused with the terms, try to understand them simply.

Value at Risk (VaR) is a statistical measure that quantifies the risk of loss in a specific time frame. VaR margin is linked to volatility and is updated six times a day. The extreme loss margin covers the losses that could occur outside the coverage of the VaR margin.

These are the statistical calculations that don’t get into that, we aim to focus on the changes made by SEBI.

If an investor buys ITC stock worth Rs, one lakh and the VaR and ELM margin on the stock is 13.94% and 3.50% respectively and the total applicable margin rate is 17.44. The total amount is roughly around 17400 is blocked from the broker’s capital by the clearing corporation as per the current norms.

What are the Changes from September 2020?

Currently, the requirement of margin is the responsibility of the broker. They maintain a sufficient deposit amount with the clearing corporation.

Recent changes said that it was mandated to collect an upfront margin on the trades executed by the client and report to the exchanges daily.

·       If the broker fails to collect the upfront margin, the penalty size will vary from 0.5 percent to 5 percent of the shortfall amount.

·       The current trading system to ensure the trades are not executed without an upfront margin in the client’s current account.

·      The fun part of the margin rule is, it will apply to the selling of shares also.

· For Example, if an investor wants to sell the stocks, they must have Rs. 17400 as an upfront margin in his account.

·       Some discount brokers criticize the new rule, that it will affect the liquidity in the market.

·       Long term perspective, market regulator SEBI wants to curb the high leverage trading.

·       It will highly affect the high-frequency traders who simply buy and sell in huge volumes.

Pledge and Unpledged Mechanism:

A brokerage firm is the sole custodian of client funds and securities. When you transfer funds or stocks to your broker who is responsible for properly handling assets.

Recently we heard about some brokers misusing the client funds and securities given to them. Therefore SEBI has come up with new rules to strengthen the regulatory framework, they introduce the new pledge and unpledged system for stocks.

For example, an investor holding 1000 stocks of ITC in his account. He wants to trade in the future & options by using these stocks as the collateral amount. For this purpose, investors move their shares to the broker’s margin account and take trades immediately. There is a loophole in the existing system that’s why some brokers misuse the client amount.

In the new pledge system, the pledged stocks directly move to the client pledging account created by the depositories. Let us have a quick discussion about the benefits of a new pledge system.

  • No misuse of securities.
  • Dividends directly come to the client’s account.
  • Pledge allowed for all approved securities.
  • Easy to unpledge the shares whenever required.

In a phasing manner, SEBI has introduced the T+2 settlement to the EOD settlement. It takes time to implement in the market.

If we buy a share on Monday, we will get shares on Wednesday. Likewise, selling also happens.

If these things work correctly, no need to worry about the upfront margin system.


  • SEBI has taken the decision based on the following principle.
  • To protect the interests of investors in securities
  • To promote the development of the securities market
  • To regulate the securities market
  • Market experts fear about the volatility and liquidity of the market.
  • High leverage brokers have a heavy impact on these new rules.
  • It doesn’t have an impact on the long-term investors but has some impact on full-time traders.

Finally, all brokers in India are ready to accept the new rules, as retail investors we also update ourselves to the new changes made by the market regulator.