SEBI Panel Backs Cash Segment Margin Cuts to Boost Trading

The Securities and Exchange Board of India has endorsed a proposal to facilitate more cash market transactions by lessening margin requirements and relaxing restrictions. This is done while still applying appropriate controls to mitigate risk. Although the Panel has given its approval to revise the existing margin system, further discussion with SEBI will be necessary before implementation, as reported exclusively by Moneycontrol.

As part of the evaluation by the Panel, it was noted that while adequate margins should be raised to mitigate risk, margins should not fall below 12.5%. Currently, most listed equities have a Value at Risk (VaR) margin between 12.5% and 20% and participate in additional (Extreme Loss Margin) ELM. VaR is based upon potential losses caused by overnight price fluctuations in a stock, and ELM will enhance the margin requirements in the event of extraordinary price movements occurring during the trading session. 

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Push for Higher Cash Market Volumes

SEBI wishes to expand participation in the cash segment to equal that of equity derivatives. SEBI has estimated a doubling of cash market activity over the next three years. In FY25, average daily cash market activity was approximately ₹1,20,782 crore, growth is anticipated to continue through FY26. 
Even though the cash market has demonstrated growth potential, the size of the cash market remains smaller than that of equity derivatives; thus continuing the call from SEBI's Chairman for enhancement in the cash segment in order to create more balance between these two markets.

Broader Efforts and Next Steps

To increase cash market volumes, the Securities and Exchange Board of India (SEBI) has developed many innovative ideas. Some of these ideas are improving the stock lending and borrowing (SLB) framework, increasing the number of Exchange Traded Funds (ETFs) on the market, and lowering Securities Transactions Tax (STT) on cash trades held within one day (intraday) and thereby reducing STT on these cash trades. The Working Group has been set up by SEBI to identify the best way to promote SlB and make recommendations to the Board. The working group will need to conduct additional backtesting before finalising any recommendations after consulting clearing corporations, exchanges and stakeholders.

In addition to the previous recommendation by the working group, the use of margin reduces the risk of default by clients if they do not pay for their shares or deliver their shares when the market goes down. As margin is considered a prepaid cost for funding trades, this needs to be done. With the working group's recommendations, SEBI will consider these with the goal of enhancing the liquidity of cash segment markets.