SEBI Explores Margin Reduction in Cash Market; Proposal Taken Up by Key Panel

SEBI Weighs Margin Reduction in Cash Trades as Panel Reviews Key Proposal

In a significant move aimed at strengthening liquidity in the equity cash market, the Securities and Exchange Board of India (SEBI) has initiated formal discussions on reducing margin requirements for cash segment trades. According to people familiar with the matter, a key SEBI advisory panel recently reviewed the proposal after gathering inputs from clearing corporations, market intermediaries, and other stakeholders.

Sources indicated that although the discussions are still at an early stage and require deeper data analysis, the regulator has acknowledged the need to revisit the current margin framework. One participant present at the meeting, speaking on condition of anonymity, noted that the committee is seeking a “fair margin structure” but wants more evidence before firming up its stance.

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Stakeholder Inputs Shape SEBI’s Margin Review Effort

SEBI’s move comes after receiving wide-ranging suggestions from market participants on how to deepen cash market volumes, an area the regulator has repeatedly emphasized in recent years. Stakeholder recommendations included enhancing the stock lending and borrowing (SLB) ecosystem, promoting Exchange Traded Funds (ETFs), rationalizing Securities Transaction Tax (STT) on intraday trades, and easing margin norms for the cash market.

Once these inputs were compiled, the proposal was placed before SEBI’s advisory committee for deliberation. Although SEBI has not officially commented—an email sent to the regulator did not receive a response—sources confirmed that ongoing discussions represent the first tangible step toward possible margin rationalization.

Why Margin Norms Are Under Review

Currently, cash market trades attract a minimum margin of 20%, which includes the Value at Risk (VaR) margin and the Extreme Loss Margin (ELM).

• VaR margin protects against potential losses due to market volatility.

• ELM serves as an additional buffer beyond regular margin requirements.

Industry participants argue that this structure often leads to scenarios where stocks categorized at 15% or 25% risk slabs are uniformly charged a 20% margin, creating inefficiencies and affecting trading participation.

One person aware of the discussions explained that committee members acknowledged the need for rationalizing margins without compromising risk management. The overarching goal, they added, is to ensure that margins remain “fair, balanced, and reflective of actual risk.”

Regulator Focuses on Strengthening the Cash Market

The push to revisit margin rules comes as SEBI intensifies efforts to deepen the cash equities market, which has grown but still lags far behind the derivatives segment in terms of traded volume. SEBI Chairperson Tuhin Kanta Pandey has repeatedly stressed the need for strong, balanced growth across segments.

Speaking at the FICCI CAPAM event on August 21, Pandey highlighted that cash market volumes had doubled in three years, but emphasized that “much more needs to be done.” More recently, addressing the CNBC-TV18 Global Leadership Summit on November 7, he stated that enhancing the cash market is crucial for capital formation, adding that a vibrant SLB mechanism is essential for better price discovery and smoother linkage between cash and derivatives markets.

Cash Market Volumes Show Strong Growth, but Gap Widens With Derivatives

According to SEBI’s published data, the average daily turnover in the cash segment has seen a consistent upward trend:

• FY20: ₹39,148 crore

• FY21: ₹66,007 crore

• FY22: ₹72,368 crore

• FY23: ₹57,666 crore

• FY24: ₹87,978 crore

• FY25: ₹1,20,782 crore

Industry estimates suggest that the current financial year may see further growth. However, despite impressive expansion, cash market turnover remains disproportionately smaller when compared to the exponentially larger derivatives segment, prompting SEBI’s renewed focus on structural reforms.

What the Proposed Margin Reduction Could Mean for Traders

If SEBI proceeds with reducing margins in cash market trades, it could bring multiple benefits:

• Higher liquidity: Lower margins often attract increased participation, boosting overall volumes.

• Reduced cost of trading: Traders and brokers may experience lower capital blockage, improving turnover efficiency.

• Better market depth: Higher participation can improve price discovery and reduce volatility.

• Stronger retail involvement: Lower upfront capital requirements may encourage more retail investors to participate in the cash market.

However, experts also warn that any reduction must be calibrated to avoid exposing the clearing and settlement ecosystem to unmanaged risks. This is why SEBI’s advisory panel is expected to examine more data and hold additional discussions before arriving at a final recommendation.

SEBI’s Next Steps Toward a More Balanced Market Structure

With discussions now underway, SEBI’s approach reflects a careful balance between reducing friction for investors and maintaining robust risk controls. Market watchers expect the regulator to undertake detailed analysis of historical volatility, stock-wise risk profiles, and settlement trends before finalizing any margin adjustments.

The proposal will likely return to the SEBI committee for deeper deliberation in the coming months, signaling that the regulator is committed but cautious in driving reforms. For now, the industry awaits further clarity as SEBI continues pursuing its broader mission: a more liquid, efficient, and balanced equity market, led by a stronger and more active cash segment.

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