SEBI Panel Recommends Margin Reduction for Cash Transactions With 12.5% Floor

The Securities and Exchange Board of India (SEBI) panel has given its approval to reduce margins on cash transactions, according to news reports, in a move aimed at encouraging higher participation in the cash market. The recommendation comes with a caveat that a fair amount of margin should still be collected to cover risk adequately.

The panel advised that margins should not fall below 12.5%, leaving the final decision to SEBI. Currently, the Value at Risk (VaR) and Extreme Loss Margin (ELM) for most stocks range between 12.5% and 20%.

Panel’s Recommendation on Margin Reduction

The SEBI panel has suggested lowering margin requirements for cash transactions to make trading more accessible and boost liquidity. However, it emphasised that risk coverage must remain intact, recommending a minimum margin threshold of 12.5%.

This proposal seeks to strike a balance between reducing trading costs and maintaining systemic safety. SEBI will review the recommendation and decide on the implementation details.

Understanding VaR and ELM Margins

VaR margin is collected to cover the maximum possible loss over a specified period due to market volatility. ELM, or Extreme Loss Margin, is an additional charge imposed by exchanges to safeguard against unexpected market movements beyond normal risk parameters.

Together, these margins currently range from 12.5% to 20% for most stocks. The proposed rationalisation aims to simplify the margin structure without compromising risk management.

SEBI’s Focus on Cash Market Growth

The regulator’s main objective is to deepen the equity cash market, which has expanded significantly but remains small relative to derivatives trading. Although cash market volumes have doubled over the past 3 years, they continue to trail the derivatives segment by a wide margin.

SEBI has consistently emphasised the importance of strengthening delivery-based trading. It has also called for structural reforms to improve participation and balance market growth.

Trading Volume Trends in Recent Years

According to SEBI data, the average daily turnover in the cash market was ₹39,148 crore in FY20 and rose to ₹66,007 crore in FY21. In FY22, the figure increased to ₹72,368 crore, followed by a dip to ₹57,666 crore in FY23.

FY24 saw a rebound to ₹87,978 crore, and by FY25, turnover surged to ₹1,20,782 crore. The trend indicates growing investor interest in the cash segment, and the number is expected to rise further in the current financial year.

Additional Measures Under Consideration

SEBI has received several proposals aimed at boosting participation in the equity cash market. Suggested measures include strengthening the stock lending and borrowing mechanism, promoting Exchange Traded Funds and reducing or removing Securities Transaction Tax on intraday cash trades.

There have also been calls to ease margin requirements to encourage higher activity. A working group is already reviewing ways to make the stock lending and borrowing mechanism more attractive, indicating a multi-pronged approach to market development.

Read More: SEBI Approves ₹650 Crore IPO Of Kusumgar.

Conclusion

The SEBI panel’s recommendation to reduce margins on cash transactions, while maintaining a 12.5% floor, underscores the regulator’s intent to boost liquidity and participation. Alongside margin reforms, SEBI is exploring measures such as SLBM improvements and tax adjustments to strengthen delivery-based trading.

These steps aim to create a more balanced and robust market structure over time. Stakeholders await SEBI’s final decision on the proposed changes.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.