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What are margins and how can margin shortfall occur?

Before an order is executed, brokers are required to collect margins against to cover instances of potential losses. SEBI mandates margin collection and when clients fail to maintain adequate margins, a margin shortfall occurs.

Margin shortfall is the difference between the SEBI mandated margins and the margin available (funds or securities). The amount of margin you need for a trade can vary based on multiple factors like liquidity, volatility, time to expiry (in case of futures & options contracts), other positions in your portfolio, etc.

You can check the margin required to enter into a trade directly on the order window:

After you have entered the trade, the margin required for your open positions can still change. You can track the breakup of your funds balances and margin utilised on the funds page on Kite.

Common instances of margin shortfall

The margins for all trades are required to be collected upfront for both F&O and equity trades. Here is a list of common scenarios that may lead to a margin shortfall and subsequent penalties:

Only Equity

1. BTST trades in stocks that require more than 50% margin

In most cases, the exchange requires VAR (Value at Risk) and ELM (Extreme Loss Margin) to be maintained as margin for equity trades. However, in some cases, the exchange may levy an additional Adhoc margin on top of the VAR and ELM. Due to the Adhoc margin, the overall margin required can be as high as 100% of the stock’s value. You can check the list of securities and the margin percentage required on this sheet .

In a BTST (Buy Today Sell Tomorrow) transaction, you need to have the entire buy value of the stock in your account. This is considered towards both your buy and sell margin requirements until settlement completes on the T+2 day .

Let’s understand how a margin of higher than 50% can lead to instances of margin shortfall with the help of an example:

Assume, on Monday you have added Rs. 10,000/- to your Zerodha account and purchased shares worth the same (10 shares of Rs. 1000 each). Let’s say the complete margin applicable in this case is 60% of the value. So, Rs. 6000/- will be the margin required for your buy trade on Monday and reported to the exchange as completely collected.

On Tuesday, you sold the share 10 shares for Rs. 1100 each. The margin required is Rs. 6,600/- [i.e. (10 x Rs. 1100) x 60%]. The total margin required is now Rs. 12,600/- [Rs. 6,000/- for the Monday buy transaction and Rs. 6,600/- for the Tuesday sell transaction] but you only have Rs. 10,000/- in your Zerodha account. The margin shortfall on Tuesday is Rs. 2,600/- [i.e. 12,600 - 10,000].

On the margin shortfall, a penalty is levied as specified by the exchanges.

2. Intraday trade is not squared-off

If you enter into an intraday trade but are unable to square it off, it will lead to a buy or sell delivery obligation. In case of sell obligations where you don’t have holdings, it will lead to an auction settlement and related penalties .

In case of buy delivery obligations, if you don’t have adequate balance to take delivery, the risk management team of the stockbroker may square-off your position. In this scenario, a margin shortfall occurs if your funds balance are inadequate for the margin requirements your initial trade along with the square-off transaction on the next day.

Only F&O

1. Increase in margin requirement due to shuffling of positions

F&O margin requirements are based on SPAN and Exposure margins . The SPAN margin is calculated on the entire portfolio of F&O positions you hold. Some trade positions that reduce the risk for your portfolio lead to a reduction in the margin requirement. In case you exit such positions without closing the other open trades, your margin requirement may shoot up.

Assume you have bought one lot of NIFTY futures and also bought one lot of NIFTY put option of 17000 strike price. The margin required on a standalone trade for Nifty futures on 2nd September, 2021 was Rs. 1.08 lakhs whereas the final margin required for both the trades combined was Rs. 44.64 thousand:

In this case, you need Rs. 44.64 thousand in your account to enter into the above trades. If you square off the Nifty 17000 PE before exiting the Nifty buy trade, your margin requirement will shoot up to Rs. 1.08 lacs. This can lead to a margin shortfall if your Zerodha account isn’t adequately funded.

2. Incremental Physical delivery margins not maintained

F&O positions held till expiry used to be settled in cash on the basis of price of the underlying stock. However, since October 2019 the settlement takes place by giving or taking delivery of the actual shares.

Unlike futures and short option trades, if you buy option contracts then you do not have to maintain SPAN and exposure margin in your account. Since the risk is limited to the value of the option, the margin requirement is limited to the option buy value. However, due to physical delivery rules, an in-the-money option is now settled by delivery of the actual underlying shares.

The Exchange levies physical delivery margins as a percentage of applicable margins (VAR + ELM + Adhoc) of the underlying stock which is levied from expiry minus 4 days for ITM options in the following manner:

Day (Beginning of the day) Margins applicable
E-4 Day (Friday BOD) 10% of VaR + ELM + Adhoc margins
E-3 Day (Monday BOD) 25% of VaR + ELM + Adhoc margins
E-2 Day (Tuesday BOD) 45% of VaR + ELM + Adhoc margins
E-1 Day (Wednesday BOD) 70% VaR + ELM + Adhoc margins

Click here to learn more about physical delivery settlement.

Both Equity and F&O

1. End of Day margins are not maintained

The exchanges publish the margin files multiple times during the day, among them the last final file is published at 5:30 PM which captures the stock's movement during close market hours, and accordingly the margins get updated in the End of Day (EOD) file.

The margin requirement displayed on Kite captures the last available file from the exchanges. So, the margin requirement you see on the platform can change after the market closes on the basis on the EOD file.

You can avoid margin shortfall in such scenarios by maintaining a healthy buffer of funds in your Zerodha account over the margin requirement. In absence of significant price movements, a buffer of 5% of your margin requirement should suffice on most days.

2. Buying stocks or trading with BTST proceeds

In a BTST (Buy Today Sell Tomorrow) transaction, you need to have the entire buy value of the stock in your account. This is considered towards both your buy and sell margin requirements until settlement completes on the T+2 day .

Assume you buy shares worth Rs. 10,000 on Monday and sell them on Tuesday for Rs. 11,000. Your reportable margin to the exchange is 20% of (10,000 + 11,000) i.e. Rs. 4,200. The Rs. 1000 profit you have made on the BTST trade will be settled by the exchange on Thursday. Therefore, on Tuesday, you can only use Rs. 5,800 (i.e. 11,000 - 4,200 - 1,000) towards margin for new trades.

3. Sell holdings and buy them back on the same day but meanwhile use the funds for another intraday or F&O trade

On selling your holdings, you can avail 80% of the sell credit towards new trades. In a scenario where you have sold your holdings, used this credit for an intraday trade and then bought back your holdings, a margin shortfall can occur if adequate margin was not separately available for the intraday or F&O trades.

Assume, you sell shares worth Rs. 10,000/- from your holdings. You now have a credit of Rs. 8,000/- available towards new trades. Let’s say you entered into a transaction where the margin required was Rs. 5,000/- and then squared off the transaction. Once the Rs. 8,000/- was again available as free balance, you bought back your holdings with the same.

In this case, the peak margin requirement for the day was Rs. 7,000/- [i.e. Rs.5,000/- + 20% of Rs. 10,000/-] but you only delivered shares worth Rs. 2,000/- which could be considered towards margin. If you didn’t have additionally available margin of Rs. 5,000/- a penalty would be levied for the shortfall.

Penalty structure

Margin penalty is charged on the shortfall amount (difference between margin available and margin required) at the following rates:

Shortfall amount Penalty Percentage
(< Rs 1 lakh) And (< 10% of applicable margin) 0.5%
(= Rs 1 lakh) Or (= 10% of applicable margin) 1.0%

If the shortfall continues for more than 3 consecutive days, a penalty of 5% is applied on the amount for each subsequent instance. Similarly, if there are more than 5 instances of margin shortfall in a month, the penalty charged is 5% of the shortfall amount beyond the 5th day.

GST is charged at 18% on the entire penalty amount. Refer to this page on NSE’s website for more details.