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I see a nudge when buying back a stock on Zerodha saying peak margin penalty may apply. What does this mean?

Due to the new peak margin rules, you cannot use the sell credit for other intraday trades if you are planning to buy back the sold holdings. Learn more about peak margin on this Z-Connect post

If you fail to maintain the required peak margin amount, the exchange may levy a penalty. 

Let's understand this with an example. 

Assume you have 100 shares of Reliance in your Demat and no other margin. You sell the 100 shares at say Rs 2000. Firstly, you will be able to use only Rs 1.6lks and not Rs 2lks. But there is another issue. Assuming you used this Rs 1.6lks to intraday trade (Buy & Sell) 1 lot of Nifty futures and also bought back Rs 1.6lks worth of Reliance shares that you had earlier sold on the same trading day. Going forward, there can potentially be a peak margin penalty for the intraday Nifty future trade, here is why.

The reason we can allow you to use the credit from selling stocks to buy other stocks or trade F&O on the same day is that we debit the shares from your demat and give it to the clearing corporation (CC) on the same trading day (Early PayIn or EPI). These stocks transferred as EPI can be then considered as margins, both for upfront and peak margin requirements. But in the above example, if you bought back 80% of stocks sold, there will be only 20 shares or Rs 40,000 worth of Reliance that will be transferred to the CC. This means that when you traded Nifty futures, you were short Rs 1.2lks (Rs 1.6lks – Rs 40k) on which there can potentially be a peak margin penalty.

So, if you exit your holdings and buyback the sold holdings on the same day, or if you had used the proceeds of the holdings sold to take another intraday trade, there could be a peak margin penalty on the intraday trade if you didn’t have sufficient funds available other than the credit from selling your holdings. So, ensure you avoid taking such trades.

The penalty amount depends on the amount of shortfall. Read more.