To ensure that investors actually have the required cash needed to back their trades, stock exchanges usually require something called a ‘margin’. Margin refers to a minimum amount of cash or securities, that you have to contribute to do a trade of a certain value.
The concept of Delivery Margin was introduced by the Securities and Exchange Board of India (SEBI) under Peak Margin norms.
Background to Peak Margin
SEBI introduced a new set of guidelines focusing primarily on Peak Margin Collection & Reporting w.e.f 01-Dec-20. Prior to Peak Margin:
- Upfront margin was collected only for the derivatives segment
- At the end of the day, Brokers reported client transactions along with the collected margin to the exchanges and clearing corporations
From 01-Dec-20, to calculate the margin obligation, exchanges and clearing corporations take minimum of 4 random snapshots of trading positions. The highest margin of these 4 snapshots is considered as the Peak Margin of the day. This is the minimum margin brokers must collect from their clients before placing any intraday or delivery orders.
The implementation of Peak Margin was rolled out gradually in 4 phases. The last phase was brought into action from 01-Sept-21 onwards which required clients to have 100% of margin for placing their trades.
Let’s understand Delivery Margin now
Prior to Peak Margin, when you sold any shares you received a Sale benefit of 100% on the same day. You could then use the Sales credit to purchase additional stocks.
Example: You sold Stocks of XYZ Ltd worth Rs 1,00,000 on Day 1. Due to this, you received Sale Benefit of Rs 1,00,000 which you can use to purchase new stocks.
Post Peak Margin, when you sell any shares now, you receive a Sale benefit of 80% on the same day. The remaining 20% will be blocked as a delivery margin and credited in your Demat Account on the next trading day after deducting all applicable charges.
For example:
- You sell stocks of XYZ Ltd worth Rs 1,00,000 on a Monday. Due to this, you receive Sale Benefit of Rs 80,000 which you can use to purchase new stocks, on Monday itself. Balance Rs 20,000 is blocked as Delivery Margin.
- After the market closes on Monday, your sold shares will be debited from your holdings as per the settlement process.
- On Tuesday, the remaining 20%, i.e., Rs 20,000, will be credited to your Demat Account and will be available for trade.
Margin Shortfall Penalty
Margin shortfall refers to the difference between the SEBI mandated requirement and the funds/securities margin available in your account. Maintaining an adequate margin is mandatory, or else you might have to pay Margin Shortfall Penalty.
Given below is the applicability of the penalty as per the shortfall of the margin collected.
| Short collection for each client | Penalty percentage |
| (< Rs. 1 lakh) and (< 10% of applicable margin) | 0.5% |
| (= Rs. 1 lakh) Or (= 10% of applicable margin) | 1.0 |
- If the short collection continues for more than 3 consecutive days, a penalty of 5% is applied on the shortfall for each subsequent instance of the short collection.
- If there are more than 5 instances of short collection in a calendar month, then a penalty at the rate of 5% is charged for every further instance of shortfall.
Example: You have Rs. 9,10,000 in your ledger and need Rs. 10,00,000 to carry forward your 2 lots of ABC company. The following table shows how the penalty will be levied.
| Day | Future Margin Required | Margin Shortfall | Penalty |
| T+1 | Rs.10,00,000/- | Rs.90,000/- | Rs.450/- (0.5%) |
| T+2 | Rs.11,01,000/- | Rs.1,01,000/- | Rs.1,010/- (1%) |
| T+3 | Rs.11,03,000/- | Rs.1,03,000/- | Rs.1,030/- (1%) |
| T+4 | Rs.11,05,000/- | Rs.1,05,000/- | Rs.5,250/- (5%) |
| T+5 | Rs.11,07,000/- | Rs.1,07,000/- | Rs.5,350/- (5%) |
In the above example, 0.5% penalty is levied till T+1 day because
- Margin is less than 1 lakh
- Margin shortfall is less than 10% of the applicable margin
However, a 1% penalty is levied on T+2 and T+3 days because the margin shortfall is more than Rs.1,00,000. And as the shortfall continues for more than 3 days (T+4), a 5% penalty is imposed on T+4 and T+5 days.
You can avoid margin penalty by ensuring that you have sufficient margin available while entering into any transaction.
Margins allow investors to buy shares on credit. A low margin requirement means that an investor needs to put less of his own funds, while a high margin requirement means that an investor needs to add a higher proportion of his funds to place his trade. The introduction of Peak margin aims to reduce and control the risks that an investor can take while trading in the stock market by tightening the limits on the amount of leverage offered to him.
