Mint Explainer: How will Sebi’s relaxed margin rules help brokers?

The changes could improve access to same-day trading, but their effect on cash-market turnover will depend on broker adoption and investor participation.(Reuters)SummaryBy eliminating additional margin collections on subsequent trades after early pay-in, Sebi's new rules aim to ease the capital burden on stockbrokers-particularly smaller firms-and streamline same-day cash market reinvestments.Gift this articleCheck your portfolioThis is a Mint Premium article gifted to you.Subscribe to enjoy similar stories.

The Securities and Exchange Board of India (Sebi) has relaxed margin rules for investors who use proceeds from share sales to buy other stocks on the same day. The new rules aim to reduce brokers’ upfront funding burden when investors use proceeds from shares sold through the early pay-in (EPI) mechanism.

Mint explains the changes and whether they will benefit brokers.

In a circular issued on 22 October, India’s market regulator eased margin requirements for trades made using proceeds from shares sold through the EPI mechanism. EPI allows investors to transfer shares to the clearing corporation before the usual settlement deadline. Once the clearing corporation accepts the transfer request, the value of those shares can be considered for meeting certain margin requirements.

Under the new rules, clearing corporations will not collect additional margins from trading or clearing members on a client's subsequent buy or sell positions, up to the value of the accepted EPI.

The eligible amount will be the lower of the EPI value or the value of the shares sold. If an investor closes the original sale position, the EPI benefit will be withdrawn. Any resulting margin shortfall can then be blocked from the broker's own collateral. The new rules will take effect on 22 February 2027, four months after the circular was issued.

The changes address a gap in the existing margin framework. When an investor sells shares held in a demat account and completes EPI, the clearing corporation receives the shares early. This reduces the risk of settlement failure and allows the margin requirement for the sale to be released.

However, if the investor uses the sale proceeds to buy another stock on the same day, the broker may still have to arrange the required upfront margin for the purchase. This can be around 20%, depending on the stock and applicable requirements.

For example, if an investor sells shares worth ₹100 and uses the proceeds to buy another stock, the broker may have to set aside ₹20 from its own trading limits to meet the margin requirement. This creates a funding burden even though the sale proceeds are available.

The change follows proposals from the Broker Industry Standards Forum and recommendations from Sebi's Risk Management Review Committee (RMRC). It aims to make better use of the value of shares already transferred for settlement, while retaining safeguards against margin shortfalls.

The relaxation could particularly benefit smaller brokers, who may have limited funds or clearing limits to support clients who want to buy stocks on the same day using proceeds from share sales.

Under the existing framework, brokers with greater financial resources have generally been better placed to offer same-day trading facilities. Smaller brokers may find it difficult to meet the margin requirements on new purchases, even when the investor has completed EPI for the shares sold.

By reducing the need to provide additional margins for eligible trades, the new rules could help more brokers offer the facility. Investors may also be able to use their sale proceeds more efficiently instead of waiting for the next settlement day.

The change builds on the EPI framework revision in October 2024. Before that revision, investors could generally use 80% of their sale proceeds on the trade day, with the remaining 20% becoming available after settlement on the following day.

The new rules will support participation in the cash market by making it easier for investors to move their funds between stocks on the same day. Lower margin requirements on eligible trades may also help brokers serve more clients without having to commit as much of their own collateral.