SEBI proposes sweeping changes to margin trading framework, opens door for LLPs and NCD funding

India’s markets regulator has proposed a comprehensive overhaul of the Margin Trading Facility framework, releasing a consultation paper on Thursday that seeks to expand broker participation, widen funding sources, and introduce operational safeguards for retail investors caught in volatile market conditions.

The Securities and Exchange Board of India floated 11 distinct proposals covering nearly every aspect of the MTF ecosystem — from how brokers raise money to lend clients, to what happens when a pledged stock suddenly loses its eligibility. Public comments have been invited until July 9, 2026.

Among the more significant proposals is the expansion of funding sources available to stock brokers. Currently, brokers offering MTF can raise capital through scheduled commercial banks, NBFCs, commercial papers, and promoter loans. SEBI has now proposed allowing brokers to also issue Non-Convertible Debentures and other debt instruments — a move that could meaningfully increase the pool of capital available for margin lending, particularly for mid-sized brokers looking to scale their MTF books.

On eligibility, SEBI has proposed raising the minimum net worth threshold for brokers from Rs 3 crore to Rs 5 crore. More notably, the regulator has proposed allowing Limited Liability Partnerships to offer MTF for the first time — a structural shift that had so far been restricted to corporate brokers only.

The paper also proposes increasing the maximum allowable exposure limit for brokers to 5.5 times their net worth, up from the current cap tied to borrowed funds and 50% of net worth. However, SEBI has built in a protective ring-fence — brokers must always keep aside an amount equal to either twice the minimum net worth required for their operations or 50% of net worth, whichever is lower. The remaining net worth can be deployed toward MTF.

For retail investors, one of the more practically relevant proposals involves what SEBI terms a “passive breach.” If a client is within their permissible exposure limit but their broker shrinks their overall MTF book, the client could inadvertently cross the 10% single-client cap. Under the proposed framework, this would not be treated as a violation, giving the client 30 days to reduce their position while restricting fresh exposure in the interim.

SEBI has also proposed a 30-day rebalancing window for brokers when a funded or pledged stock loses its Group I classification, gets shifted to the Trade-for-Trade segment, or is suspended from normal trading. This addresses a long-standing concern that sudden downgrades could force brokers into rushed liquidations that hurt both clients and market stability.

On the operational side, the regulator wants to allow fungibility between a client’s MTF and regular trading ledgers, enabling idle capital to move freely between the two rather than staying locked in separate silos. Excess cash collateral in the MTF account would also be subject to periodic running account settlement.

One proposal SEBI chose not to change is the higher maintenance margin requirement — VaR plus five times the Extreme Loss Margin — for positions where the client’s cash is used as pay-in and the same purchased stock serves as collateral. The regulator acknowledged industry calls to reduce this to VaR plus three times ELM but held firm, citing the compounded risk of collateral and funded exposure eroding simultaneously in a downturn.