1. Regulatory Framework

• Primary: SEBI Act, 1992, Securities Contracts (Regulation) Act 1956, SEBI Circulars - CIR/HO/MRD2_DCAP/CIR/P/2020/127 dated July 20, 2020 and SEBI/HO/MRD2_DCAP/CIR/2021/0598 dated Dec 2021 on Peak Margin
• Execution: NSE/ BSE Clearing Corporations - NSCCL, ICCL, MCXCCL
• Principle: No trade without upfront margin. Leverage banned.

After retail F&O blow-ups, SEBI phased peak margin in 4 phases: 25% from Dec 2020, 50% March 2021, 75% June 2021, 100% from Sep 1, 2021. From Sep 2021, full SPAN + Exposure must be collected BEFORE trade, even for intraday MIS/BO/CO.

In Oct 2024, SEBI tightened further - minimum contract value raised to ~Rs 15 lakh and each exchange allowed only one weekly expiry to curb speculation.

2. Types of Margin - What Must Be Collected

For Equity Cash: VaR + ELM + Adhoc. Minimum 20% upfront before trade.

For Equity F&O / Currency Derivatives / Commodity Derivatives:

• SPAN Margin: Standard Portfolio Analysis of Risk - portfolio based initial margin for worst-case loss
• Exposure Margin / Additional Margin: Extra buffer for adverse moves. SPAN + Exposure is the total initial margin
• MTM Margin: Mark to Market loss collected T+1
• Peak Margin: Maximum intraday margin across 4 random snapshots taken by clearing corporation. Your obligation = highest snapshot of the day, not EOD. If snapshots are Rs 25k, 31,250, 12,500, 18,750 - peak is Rs 31,250.

Process Rule:

Company shall ensure margin collected from clients is not less than peak margin obligation computed on any intraday snapshot published by Clearing Corporation. Risk system shall monitor all four intraday snapshots.

Collateral Compliance:
Since Feb 2020 pledge/re-pledge system - Client pledges in own demat to broker who re-pledges to CC. Broker cannot use client securities for own margin. Power of Attorney pooling banned.

3. Obligations

Broker/Trading Member:

1. Collect upfront VAR+ELM / SPAN+Exposure BEFORE order
2. Report client-level margin correctly to exchange - false reporting = penalty
3. No funding of client margin from own funds beyond T+2
4. Square-off only after margin call demand - condition precedent
5. Maintain 50% cash / 50% collateral, haircut applied - e.g. Rs 1 lakh stock with 20% haircut = Rs 80k margin

Client:
Must maintain free cash + pledged securities = Peak Margin. Shortfall even for 1 snapshot attracts penalty.

Clearing Corporation:
Imposes penalty on broker, then broker can pass to client as per agreement. ITAT Ahmedabad held interest on margin facility is NOT penalty under Sec 37(1), allowable.

4. Penalty Structure

SEBI prescribed slabs:

• If short/non-collection continues >3 consecutive days, 5% of shortfall per day beyond 3rd day
• If >5 days in a month, 5% per day beyond 5th day
• Exchange formula: <Rs 1 lakh AND <10% of margin = 0.5% penalty, scaling to 1% and 5%
• False reporting: Rs 2,05,43,947 false reporting by member in CD segment on 26-04-2016 and 21-06-2016 was penalized

5. Key Case Laws

A. Karvy Stock Broking Ltd - Rs 2,300 Crore Misuse - 2019-23
Largest margin compliance failure. Karvy misappropriated client securities pledged to fund its real estate arm. It misinformed NSE that account was BSE margin account to avoid detection. NSE accepted at face value - lack of reasonable due care. SEBI barred Karvy, NSE suspended license for all segments, BSE and NSE fined Rs 3cr and Rs 2cr respectively for laxity, and clearing corps ICCL Rs 50L, NCCL Rs 25L for not adhering to Early Warning Mechanism. SAT upheld. Established principle: Exchange cannot outsource vigilance to broker declaration.

B. Angel Broking Pvt Ltd vs SEBI - SAT Appeal 25/2013 - Oct 22, 2013
SEBI penalized Angel for failure to collect Initial Margin and Mark to Market margin and for not reporting. SAT upheld on merits - collection is mandatory, not discretionary. Penalty modified to banning from taking new clients for 2 weeks. Principle cited in all later cases.

C. NCJ Share & Stock Brokers vs SEBI - SAT
NCJ argued penalty harsh compared to Angel Broking. SAT accepted proportionality argument: "Argument of appellant that penalty imposed is harsh as compared to Angel Broking deserves acceptance." Upheld violation but reduced to same 2 weeks ban on new clients.

D. Bonanza Portfolio Ltd vs Mrs. Roshanara Bhinder - Bombay High Court - April 16, 2015
Landmark for client rights. Held broker cannot square off open derivative positions without demanding additional margin. Demand is condition precedent. Even though SEBI/NSE circulars allow auto square-off, broker must issue margin call. If broker fails to demand, square-off is illegal.

E. IIFL Commodities Ltd - Margin False Reporting - SAT 2025-26
NSE inspection found false margin reporting. MCSGFC originally levied heavy penalty. SAT on Nov 28, 2025 partly allowed appeal reducing to Rs 40 lakh per year (Rs 1.2cr), then on review Feb 16, 2026 further reduced to Rs 25 lakh per year total Rs 75 lakh. Shows SAT's proportionality doctrine but upholds violation.

F. Whether Collection of Margin on Derivative Trades is Mandatory? - IndiaCorpLaw analysis
Citing SEBI and NSE circulars which impose penalty on broker for not collecting prescribed margin. Exchange bye-laws mandate square-off but after demand.

6. Compliance Checklist for 2026

1. Pre-trade margin check API mandatory
2. 4 intraday snapshots - keep buffer 10-15% over SPAN
3. Pledge only via CDSL/NSDL e-pledge, auto re-pledge to CC before 4pm
4. MTM loss collection T+1 by 11am next day
5. Peak margin report to client daily
6. No use of one client's excess to fund another - client-level segregation
7. For proprietary, separate CP code