The National Stock Exchange (NSE) has flagged multiple compliance lapses by brokers and authorised persons (APs) across margin trading facilities, client fund management, and cybersecurity controls, based on inspections conducted between October 2025 and March 2026. The findings, covering a six-month inspection window, expose systemic gaps in how brokers handle retail investor funds at a time when margin-based lending has surged to record levels.

Key Violations Identified

Among the most significant concerns, the NSE found instances where brokers extended Margin Trading Facilities (MTF) against ineligible securities — including stocks outside the eligible Group I category. In several cases, adequate margins were not collected from clients despite regulatory requirements mandating brokers to secure margins in the form of cash, cash equivalents, or eligible securities after applying prescribed haircuts.

The exchange also observed delays and outright failures in issuing daily margin statements to clients. Several of those statements, when issued, contained inaccurate or incomplete details. Brokers were additionally found to have incorrectly reported both margin and mark-to-market (MTM) loss collections to the exchange.

Client Fund Mismanagement

The NSE's inspection findings revealed that client funds were not settled within prescribed timelines, and material discrepancies were discovered in client retention statements. In some instances, brokers paid out funds exceeding clients' available credit balances — a clear violation of client-fund segregation norms. Mandatory SMS and email alerts, which are required to inform clients of fund transfers during running-account settlements, were also found missing in several cases.

Authorised Persons Under Scrutiny

Authorised persons — intermediaries who act as sub-brokers — were found engaging in a range of prohibited activities. These included receiving or paying client funds directly, executing trades using client credentials without proper authorisation, and obtaining blanket permissions to trade on behalf of clients. Some APs were also found conducting trades primarily to generate brokerage income, offering fixed or assured returns, entering into profit-sharing arrangements, and providing unauthorised portfolio management services — all of which are explicitly barred under Securities and Exchange Board of India (SEBI) regulations.

Rapid MTF Expansion Raises the Stakes

The observations come against the backdrop of a near-55% surge in the MTF book. According to data compiled by Care Edge Ratings from NSE and BSE figures, the MTF book size grew from approximately ₹96,000 crore in August 2025 to ₹1.48 lakh crore in August 2026. This expansion has amplified systemic risk, as any shortfall in margin collection or fund mismanagement at scale could expose retail clients to outsized losses during market downturns.

What Happens Next

The NSE's flagging of these violations typically precedes formal enforcement action by the exchange and, where warranted, a reference to SEBI for regulatory proceedings. Brokers found non-compliant are usually required to rectify lapses within a stipulated timeframe and may face fines or trading suspensions. With SEBI having tightened its focus on investor protection norms over the past two years, the latest findings are likely to draw regulatory scrutiny well beyond the exchange level. Retail investors with MTF positions are advised to verify margin statements and fund settlement records with their brokers.