Buy-side margin relief on cards as Sebi looks to lift cash market turnover

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The Securities and Exchange Board of India (Sebi) is considering a proposal to waive upfront margins on buy trades executed using proceeds from same-day stock sales under the early pay-in (EPI) mechanism, in a move that could improve liquidity and boost cash market turnover.

The proposal was discussed at a meeting of Sebi’s risk management review committee (RMRC) last week. However, the talks are preliminary and no final decision has been taken yet, four people aware of the discussions told Mint.

“A proposal to reduce margins for buy trades made after a sell transaction with early pay-in has been discussed in Sebi’s risk management review committee after thorough discussions in the Industry Standards Forum,” the first of the four persons cited earlier said, all speaking on condition of anonymity.

“The industry has been demanding this change for a very long time. It is a disservice to the investor if they are unable to use their money to make trades,” the person added.

Under the current framework, when an investor sells shares already held in the demat account through the EPI mechanism, the trade is cleared by the clearing corporation on the trade day itself, eliminating settlement risk. Consequently, the sell-side margin is released.

However, if the investor immediately uses those sale proceeds to buy another stock on the same day, brokers are still required to fund the applicable upfront margin on the purchase, typically around 20% depending on the stock. This means that even though an investor may have ₹100 worth of sale proceeds available, ₹20 has to be blocked by the broker using his own trading limits with the clearing corporation.

Queries emailed to Sebi remained unanswered till press time.

Market participants believe the move could encourage greater participation in the cash segment, an area Sebi has been trying to strengthen amid concerns over excessive retail activity in derivatives.

"Same-day settlement, if implemented seamlessly, is a fantastic move as it will increase liquidity in the market and make churning portfolios that much easier," said Anand K. Rathi, co-founder of wealth management platform MIRA Money.

Ambareesh Baliga, independent market analyst, echoed the view.

“Cash market turnover could get a boost if Sebi accepts the recommendation. Currently, smaller brokers might not have the limits to meet margin needs for a stock that an investor, who uses EPI , wishes to buy on the T-day instead of waiting for a T+1 settlement.”

If approved, the proposal would allow many more brokers to offer the early pay-in facility to the investors. Though same-day settlement exists, generally the larger brokers offer it while clients of smaller brokers can't avail of this facility. Clearing corporations could effectively waive the margin requirement for clients through their brokers under the risk management review committee's recommendation.

The EPI framework, revised in October 2024, allows investors to use the proceeds on the same day instead of normal delivery cycle where settlement happens on a trade plus one day basis (T+1).

Before the change, investors could access only 80% of sale proceeds on the trade day, with the remaining 20% becoming available after settlement on the following day. The revised framework also allows traders to deploy intraday profits immediately instead of waiting until the next trading session.

The proposed relaxation would extend that flexibility further by removing the need to block fresh margins on purchases funded entirely through EPI-enabled sale proceeds.

The exchange settles trades through clearing corporations, which guarantee settlement of all trades done on regulated exchanges. The two clearing corporations for equities are NSE's NSE Clearing Ltd (NCL) and BSE's Indian Clearing Corporation Ltd (ICCL). The trades on either exchange can be settled by either of the two clearing corporatio...