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Why is a Nudge displayed saying a margin penalty may apply for BTST trades?

This nudge alerts about the possibility of exchanges levying a margin penalty on the client. A margin penalty is levied by the exchange if a trade is executed without maintaining adequate margins in the account. To know more about margin penalties, see What is a margin penalty, and why is it charged?

For equity delivery transactions, the margin required is 20% of the trade value in most cases. The margin collected can be in the form of either funds or collateral. There are cases where margin shortfalls can occur, and a margin penalty may be charged for BTST trades in stocks where the ad-hoc margin prescribed by the exchange is more than 30% of the trade value. Zerodha shows a nudge for such instances.

All the stocks where an ad-hoc margin is currently applicable can be found on this list. (DOC)

Example Scenario

  1. Assume a client has ₹10,000 in the Zerodha account.
  2. On Monday, 5 shares of Reliance are bought at ₹2000 each.
  3. On Tuesday, the same 5 shares of Reliance are sold at ₹2100 each.

Buy Value = ₹10,000/-

Sell Value = ₹10,500/-

Margin required for buy transaction = 20% of ₹10,000 = ₹2,000/-

Margin required for sell transaction = 20% of ₹10,500 = ₹2,100/-

₹10,000 in the trading account will be blocked immediately on Monday towards the purchase of Reliance shares. This is settled to the exchange on Tuesday (T+1 day). In the meantime, it can be considered as a margin for the trades. On Monday, the margin required is ₹2,000/- and on Tuesday, it is ₹4,100/- (i.e. 2000 + 2100).

In some cases, the exchange may levy additional margin requirements for some shares in the form of ad-hoc margins. If the ad-hoc margin exceeds 30% of the trade value, the overall margin required for a BTST trade will exceed the funds blocked from the trading account for the original purchase.

In the above example, assume that the ad-hoc margin for the stock is 40%. In such a case,

Margin required for the buy transaction = 60% of ₹10,000 = ₹6,000/-

Margin required for the sell transaction = 60% of ₹10,500 = ₹6,300/-

The overall margin required on Tuesday will be ₹12,300 (60% of 10,000 + 60% of 10,500). If there are only ₹10,000 in the Zerodha account when the Reliance shares were purchased, the available margins will not be sufficient on Tuesday after selling, and a penalty may be levied on the client. The penalty amount depends on the amount of shortfall. To know more about the rate of penalty levied by the exchange, see How is the margin penalty calculated?