Yes, in certain cases. If you trade futures or sell (write) options, you're using leverage, and you can lose more than your initial capital, ending up with a negative account balance. This cannot happen when you buy stocks for delivery, since your maximum loss there is limited to the amount you invested. It also cannot happen when you buy index options, since your maximum loss is limited to the premium you paid.
You can also end up with a negative account balance in other scenarios, such as:
- Placing market orders: Buying equity (CNC) or options using market orders can execute at a price higher than your available cash, especially during high volatility.
- MTF price drops: If the price of stocks purchased under Margin Trading Facility (MTF) goes down.
- Physical delivery: Settlement of F&O contracts via physical delivery, which requires funding the full contract value.
- Accumulated charges: Frequent trading where brokerage, taxes, and other transaction charges accumulate and exceed your cash balance.
- Unclosed intraday buy positions: Leaving an intraday (MIS) equity buy position open, which can get marked for delivery, requiring more funds than available.
When you trade futures or sell options or trade intraday (MIS) or MTF, you only pay a margin, a small part of the total contract value, not the full amount. But if the market moves against you, your loss is based on the full contract value, not just your margin.
For example, you deposit ₹1,00,000 margin to hold a ₹10,00,000 position. If the price drops 20% against you, you lose ₹2,00,000. This wipes out your capital and leaves your account ₹1,00,000 in the negative.
One crash shows exactly how bad this can get. On 20 April 2020, a sudden drop in global demand sent WTI crude oil futures to -$37.63 per barrel, and MCX settled Indian crude oil futures at -₹2,880 per barrel. A trader holding just one lot (100 barrels) with a standard margin of around ₹1,00,000 would have owed roughly ₹2,88,000 on settlement, not lost it, owed it, on top of the margin already gone. Thousands of accounts went negative overnight, since their risk was tied to the full contract value, not just their margin.
How illiquidity makes it worse
When an asset hits its upper or lower circuit, buyers and sellers disappear from the market. When this happens:
- Your stop-loss orders can't go through, since there's no one willing to buy.
- The exchange can't automatically close your position, since there are no matching orders.
Your trade stays open, and your losses keep growing as the price keeps falling.
What happens once your balance goes negative
You must add funds immediately to clear the negative balance. Until you do, three things happen:
1. Delayed Payment Charges (DPC)
Zerodha charges interest on a negative account balance, shown as Delayed Payment Charges in your funds statement:
| Situation | Rate |
| Negative account balance (debit interest) | 0.05%/day (about 18% a year, or ₹50 per lakh per day) + 18% GST |
| Utilizing collateral margin to buy options (carried overnight) | 0.05%/day (about 18% a year, or ₹50 per lakh per day) on the utilized collateral amount |
| Using more than 50% non-cash collateral for F&O margin (breaks the 50:50 rule) | 0.035%/day (about 12.775% a year, or ₹35 per lakh per day) on the shortfall |
2. Exchange penalties for margin shortfall
SEBI requires you to keep enough margin (SPAN + Exposure) for your open positions. The exchange checks this 4 times a day at random for stocks and F&O (8 times for commodities), plus once at the end of the day. If you fall short, you're charged a penalty:
|
Shortfall amount |
Penalty |
|
Under ₹1 lakh and under 10% of the required margin |
0.5% of the shortfall |
|
₹1 lakh or more or 10% or more of the required margin |
1.0% of the shortfall |
|
Shortfall continues for more than 3 days in a row, or happens more than 5 times in a month |
5.0% of the shortfall (higher rate) |
An 18% GST is added to the penalty.
3. Zerodha may square off your positions
- Auto square-off: Zerodha may sell your open F&O positions or your stock holdings to cover the shortfall. This costs ₹50 + 18% GST per placed order.
- Broken hedges: If part of a hedged position is exited to cover a shortfall, the rest of your position may be left exposed to unlimited risk.
- Account blocked: You won't be able to take new F&O positions until you have a negative balance due to any margin shortfall.
- Pledged stock liquidation: If you buy options using collateral margin and suffer losses, you must deposit cash to cover them. If you do not deposit funds, or if the market value of your pledged holdings drops (which reduces your available margin), Zerodha may square off your active options or sell your pledged stocks to recover the debit.