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Margin Trading in India: A Study of Financial Leverage, Operational Mechanisms, Risks and Regulatory Compliance

Author(s) Arun Kumar Jain
Country India
Abstract Margin trading has emerged as a pivotal mechanism for financial leverage in India’s capital markets, especially in the post-2020 era shaped by digital trading platforms and increased retail investor participation. This paper examines the conceptual foundations, operational architecture, and regulatory contours of margin trading in the Indian equity market, based on data up to 2023.
The study investigates how liquidity-constrained retail investors utilize Margin Trading Facilities (MTF) to amplify market exposure, capitalize on short-term volatility, and engage in delivery-based strategies. Framing the analysis within principles of compounding and leverage, it explores the growing role of brokers, clearing corporations, and regulators, particularly SEBI, in enabling and monitoring leveraged transactions.
Core operational elements, including Value at Risk (VaR) margin, Extreme Loss Margin (ELM), Mark-to-Market (MTM) settlement, and the Peak Margin framework, are evaluated. Through regulatory circulars, broker disclosures, and empirical market data, the study uncovers disparities in pledge workflows, interest charges, and client communication practices. Behavioral dimensions, such as investor overconfidence, herd instincts, and risk underestimation, are also critically examined.
While SEBI’s reforms, notably the margin pledge mechanism and T+1 settlement cycle, have enhanced transparency and curtailed misuse of client assets, challenges persist in uniform implementation and enforcement. Retail margin exposure has seen institutionalized growth, with leveraged positions estimated at ₹75,000–₹85,000 crore by 2024. This expansion raises red flags around systemic overleveraging, forced liquidations, and investor safety during periods of elevated volatility.
The paper concludes with tiered recommendations: regulatory interventions for standardized disclosures and surveillance; broker-level advancements in margin reporting and product design; and targeted investor education on leverage risks and behavioral biases. It also outlines future research avenues, including AI-driven margin risk assessment and the implications of T+0 settlement on leverage dynamics.
By integrating operational, behavioral, and regulatory perspectives, this study aims to foster a more resilient and risk-aware margin trading ecosystem in India’s evolving capital markets.
Keywords Margin Trading, Financial Leverage, Retail Investors, MTF, Indian Equity Market, Regulatory Compliance, SEBI, Broker Disclosures, Clearing Corporations, VaR Margin, ELM, MTM Settlement, Peak Margin, Digital Trading, Liquidity Constraints, Investor Behavior, Overconfidence Bias, Herd Mentality, Risk Awareness, Pledge Mechanism, T+1 Settlement, Interest Rate Disparities, Pledge Workflows, Margin Communication, Forced Liquidation, Investor Protection, Systemic Risk, Financial Literacy, AI Risk Scoring, T+0 Settlement
Field Business Administration
Published In Volume 16, Issue 2, July-December 2025
Published On 2025-07-18
Cite This Margin Trading in India: A Study of Financial Leverage, Operational Mechanisms, Risks and Regulatory Compliance - Arun Kumar Jain - IJAIDR Volume 16, Issue 2, July-December 2025. DOI 10.71097/IJAIDR.v16.i2.1473
DOI https://doi.org/10.71097/IJAIDR.v16.i2.1473
Short DOI https://doi.org/g9vdfv
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