The Securities and Exchange Board of India (SEBI) on Thursday, 18 June released a consultation paper proposing a sweeping overhaul of the Margin Trading Facility (MTF) framework, covering broader funding avenues for brokers, revised exposure ceilings, and a range of operational relaxations. The proposals come as margin funding activity continues to expand across the Indian stock market, prompting the regulator to recalibrate both risk management and ease-of-business provisions. Public comments have been invited until 9 July.

Expanded Funding Options for Brokers

One of the most significant proposals is the expansion of permissible funding instruments for brokers running MTF operations. Currently, brokers can mobilise resources primarily through bank borrowings, loans from non-banking financial companies (NBFCs), and commercial paper. SEBI has now proposed allowing brokers to also raise funds via Non-Convertible Debentures (NCDs) and other debt instruments, giving them a wider and potentially more cost-efficient capital base.

Additionally, the regulator has proposed permitting brokers to accept certain Early Pay-In (EPI) sale credits as collateral for fresh MTF positions, subject to specified safeguards. This is intended to unlock liquidity that currently sits idle during the settlement cycle.

Revised Exposure and Net Worth Limits

SEBI has recommended revising the exposure limits that govern how much a broker can deploy toward margin funding. Under the new framework, brokers would be permitted to direct a larger share of their net worth into MTF operations, provided they maintain a minimum capital buffer. An overall exposure ceiling of 5.5 times net worth would apply.

Alongside this, the regulator has proposed raising the minimum net-worth requirement for brokers offering MTF services from ₹3 crore to ₹5 crore. The higher threshold is designed to ensure that only adequately capitalised entities extend margin credit to investors — a safeguard that becomes more important as MTF volumes grow.

LLPs Now in Scope

In a structural eligibility change, SEBI has proposed extending MTF authorisation to Limited Liability Partnerships (LLPs), which are currently barred from offering these services. This could open the margin trading segment to a broader set of intermediaries and increase competitive pressure on existing players.

Operational Relaxations and Rebalancing Window

To address a recurring pain point for brokers, SEBI has proposed a 30-day rebalancing period for cases where securities held as MTF collateral lose their eligible status. This can occur when a stock exits the Group I category, is moved to the trade-for-trade segment, or becomes unavailable for normal market trading. The grace period would give brokers time to restructure positions without being forced into disorderly liquidations.

The collateral framework itself is also set for an expansion, with SEBI proposing broader categories of securities that can be pledged under the MTF structure. The combination of a wider collateral basket and the EPI credit proposal is aimed at improving capital efficiency across the broker ecosystem.

What Comes Next

SEBI's consultation process closes on 9 July, after which the regulator will review stakeholder submissions before finalising the revised MTF norms. Brokers, investor associations, and market infrastructure institutions are expected to submit detailed responses. If adopted largely as proposed, the revised framework would represent the most comprehensive update to MTF rules in several years, with implications for retail investors who use leverage to build equity positions.