Types of penalties levied by the exchange and regulators

Are you curious to know what penalty is and what are the various penalties levied when you start investing? The penalty is an amount imposed by the regulators on the members who fail to fulfill the margin/short delivery obligations. Levying penal charges is a necessity for the regulators to effectively control and regulate the market. Once you know all about these penalties, you can take effective measures to avoid them. So let’s dive deeper to understand about the various types of penalties levied by the exchanges and regulators and what to do in such a case.

1. Margin Shortfall Penalty

Specific upfront money paid to carry the derivatives contracts and stocks bought via margin product flawlessly is known as margin and any gap in this upfront balance is called Margin Shortfall. As prescribed by the regulators, Margin Shortfall Penalty is levied on Intraday positions as well as on overnight positions held.

Apart from the above, a margin penalty is also levied when you sell the shares but have not authorised the TPIN. In such a case, a margin penalty is applicable for T day & T+1 day, and an Auction Penalty will also be levied on T+2 day.

Types of margin shortfall which attracts penalty 

1. MTM Margin (Mark to Market)
2. Peak Margin Shortfall
3. Upfront Margin Shortfall

Here’s how you can calculate the margin penalty.

• If short/non-collection of margins for a client
  • Continues for more than 3 consecutive days, then a penalty of 5% of the shortfall amount shall be levied for each day of continued shortfall beyond the 3rd day of the shortfall.
  • In case of, more than 5 days in a month, then a penalty of 5% of the shortfall amount shall be levied for each day, during the month, beyond the 5th day of the shortfall

Let’s understand this with an example:

Say 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.

In the above example, 0.5% penalty is levied till T+1 day because

• Margin is less than 1 lac
• 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.

2. Auction Penalty

If you have sold XX shares and you fail to deliver them, the exchange will conduct an auction and buy these shares in the auction market to deliver them on T+3 day. In such a case, the defaulter (In this case, you) has to pay a penalty to the exchange which is called the Auction Penalty.

The below table will give you a better understanding of the auction penalty charges levied in various situations.

Let’s understand this with an example.

You sold 80 shares at Rs. 100 per share but you defaulted in delivering the shares. As per the guidelines, the exchange will buy the shares in the auction and deliver them on T+3 day.

Below are the share prices from T to T+3 days.

The following table will give you an idea about how the auction penalty is calculated in various situations.

Other situations in Auction Penalty 

Closing out in case of failure to give delivery for trade-to-trade

In a trade-to-trade category (a category in which delivery of shares is compulsory and you can sell them after they are credited to your Demat account), in case of failure of delivery, there is no internal auction. Auction is carried out directly by the NSE (National Stock Exchange) and the auction price will be calculated as mentioned below:

Highest price from the T Day to T+1 Day or T+1 Day’s Closing Price + 20%, whichever is higher.

Compulsory close-out of securities under Corporate Auction

In case of securities having corporate actions and no ‘no-delivery period’ for the corporate action, all cases of short delivery will be compulsorily closed out. Because of this no-delivery period no auction or transfer of securities can take place. Auction price can be calculated as below:

Highest Price from the T Day of the settlement to the Auction Day or Closing Price of the Auction Day + 10%; whichever is higher

3. NSEFO Physical Delivery Shortages Penalty 

When the seller fails in delivering the agreed number of shares to the buyer, a penalty is levied by the exchange. This penalty is imposed by the PCM for the trades in F&O scrips on a monthly basis.

The below table shows different penalties levied in different situations.

Let’s understand this table with the above-mentioned example assuming you are based out of Mumbai.

4. Ban Period Penalty

The exchange set an MPWL (Market Wide Position Limits – the maximum number of contracts that can be open at any time) for the stocks in the F&O segment. If the open positions of the security exceed 95% of the MPWL, then the stock enters a ban period.

During the period for which the ban is in force, the exchange at the end of each day will ensure that any member or client has not increased their existing position of security or created a new position. If the client/trading member has done the aforesaid, they will be subject to a penalty. It is also known as the Market Wide Position Limit Violation.

The penalty levied will be 1% of the value of increased position subject to a minimum of Rs. 5,000 and a maximum of Rs. 1,00,000. You can avoid this penalty by not buying new shares of the scrip on which the ban persists.

Conclusion

Now that you have understood all the penalties levied by the exchange and the regulators, it will be easier for you to avoid them. All you have to do is make sure that you have enough actual margin and margin against shares in your account while trading. In case any penalty is levied on you, then you can find the details of the same in your Ledger. So, stop worrying and start trading.