SEBI Panel Endorses Cash Segment Margin Reduction

The Securities and Exchange Board of India (SEBI) has approved a plan to reduce the required margins needed to conduct cash market transactions in order to promote more activity, according to an exclusive report by Moneycontrol. In addition, SEBI is looking to deepen the trading of its cash equities in the marketplace as well. 

The SEBI panel also reviewed the existing cash market system and determined that while an adequate margin is required, no margin should be less than 12.5%.

As there are a large number of stocks classified as high risk, the Value at Risk (VaR) and Extreme Loss Margin (ELM) associated with cash market transactions will generally be fairly high, and the range for the majority of stocks is between 12.5% and 20%. VaR therefore provides protection against price volatility, while ELM provides an additional layer of protection in the event of an extremely volatile circumstance. These two measures will enable SEBI to promote a healthier stock market as a whole.

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Cash Market Volume Growth

The increase in cash market trading volume is a trend that has continued to grow at a rapid pace over the past three years, with a reported average daily turnover of over Rs 1,20,782 crore during FY25 per SEBI statistics. The FY25 volumes are double what they were in FY20, when cash market trade was Rs 39,148 crore, which is indicative of a positive increase. The volume of cash market trading will remain well below that of the total equity derivative market, and therefore, SEBI will continue to place additional emphasis on increasing volumes in the cash market space.

The need for continued improvement in cash market trading has been strongly emphasised by the Chairman of SEBI on numerous occasions, and he will continue to work towards strengthening cash market participation and improving the overall balance of the capital markets in India.

Broader Proposals and Next Steps

To promote the growth and heritage of cash trading volume, SEBI is currently evaluating a number of concepts, including enhancing the existing stock lending and borrowing process, increasing ETF activity, and lowering STT on intraday cash trading. A stock lending working group has been established to study the popularity of stock lending in the market.

To develop a more comprehensive view, additional back-testing and consultations with all stakeholders, clearing corps, exchanges, and other interested parties, are needed. The margins on trades provide a form of pre-funding, thus limiting the risk of default to those clients who are unable to pay or deliver shares in times of extraordinary market stress.