Introduction
In a country where financial literacy and investment appetite are steadily growing, India’s capital markets have experienced a dramatic rise in retail participation, especially in the derivatives segment. Between FY21 and FY23, the retail share in equity derivatives turnover touched over 36%, according to NSE data. With the proliferation of low-cost brokers and easy mobile access, more traders entered the arena with limited capital, often chasing quick gains.
This burgeoning wave of participation prompted the Securities and Exchange Board of India (SEBI) to recalibrate its regulatory lens. The result: a robust overhaul of margin rules designed to dampen unchecked speculation, enhance risk containment, and ensure a healthier trading ecosystem.
Let’s unpack the ripple effects of these changes, both on paper and in practice.
Understanding SEBI’s New Margin Rules
SEBI’s revised rules, implemented progressively from late 2023 through 2025, aim to:
- Ensure brokers collect adequate margins upfront.
- Reduce the misuse of margin offsets and hedged positions.
- Introduce prudence in intraday and expiry day risk exposure.
- Make contracts less accessible for small, speculative traders without strong capital backing.
Each change targets a unique loophole or market vulnerability that has surfaced in recent years.
Increase in Minimum Contract Size
One of the most headline-grabbing changes was SEBI’s direction to increase the minimum lot value for index derivatives from ₹5 lakh to ₹15 lakh, effective November 2024. The objective was simple: reduce easy entry for undercapitalized traders.
For example, the Nifty 50’s lot size was cut from 50 units to 25, but the higher notional value meant retail traders needed significantly more capital to take a single position. This move made the market less attractive for those looking to “gamble” without fully understanding the risks involved.
The new rule encourages disciplined trading and pushes novice investors to explore cash market opportunities or mutual funds instead.
Introduction of Extreme Loss Margin (ELM)
The Extreme Loss Margin (ELM) is an additional cushion that brokers must collect on top of existing span margins. As of April 2025, SEBI introduced a mandatory 2% ELM for short index options, particularly to handle last-hour expiry day volatility.
In high-leverage environments like options trading, even a 1% market swing can wipe out large positions. The ELM ensures that a sudden spike in volatility, like a 400-point Nifty move on budget day, as seen in February 2023, doesn’t cascade into defaults and systemic risk.
Upfront Collection of Option Premiums
Another critical change is the enforcement of upfront option premium collection. Earlier, some brokers allowed clients to take positions without immediately paying the premium, using margin from other positions.
Now, the premium must be paid in full before order execution. This tightens the flow of capital and discourages over-leveraging.
Retail traders who once placed 20 contracts of far OTM options with little capital now need to pay the full premium for each, leading to a natural decline in erratic speculative trades.
Removal of Calendar Spread Benefits on Expiry Days
Until recently, traders could exploit calendar spreads by buying and selling contracts across different expiry dates, while benefiting from lower margins due to offsetting positions.
But on expiry days, when one leg expires and the other remains open, traders could end up under-margined. SEBI has now removed this benefit on the last trading day to ensure brokers collect full margins for the remaining leg.
This prevents loopholes that caused sharp margin calls and liquidations, especially visible in Bank Nifty’s weekly expiry sessions.
Reduction in Weekly Expiry Contracts
SEBI has now allowed only one weekly contract per index per exchange. This move directly impacts high-frequency, short-term trading, which thrived on quick expiries and gamma scalping.
Before the rule, both NSE and BSE listed weekly contracts for Nifty, Bank Nifty, and Fin Nifty, flooding the market with expiry opportunities almost every weekday.
Limiting this ensures traders focus on quality setups, rather than chasing short-term theta decay, and reduces the burden on clearing corporations.
Intraday Monitoring of Position Limits
Traditionally, position limits were monitored at end-of-day, giving room for intraday overexposure. SEBI has mandated real-time position tracking, beginning April 2025, across all F&O contracts.
This empowers exchanges and brokers to flag excessive positions before they snowball into risk events, especially for retail clients who often don’t track portfolio exposure with precision.
Impact on Retail Traders and Brokerage Firms
For retail traders, these margin rules feel like cold water, but for good reason. Margin-fueled trades are a double-edged sword. As per SEBI’s risk disclosure circular (2023), 90% of retail traders in F&O incurred losses, with an average loss of ₹1.1 lakh per trader annually.
The new rules enforce capital discipline, foster better hedging practices, and reduce sudden drawdowns.
Brokerages, meanwhile, have had to revamp their backend risk systems, build margin calculators, and roll out risk dashboards for clients. Some brokers have reported a 15–20% drop in F&O volumes, but the long-term benefit is a healthier client base with lower churn.
Case Study: Zerodha’s Adaptation to New Rules
Zerodha, India’s largest retail brokerage, has taken a proactive stance. In late 2024, the firm launched:
- ‘Nudge’ system enhancements: alerts that prevent clients from making unhedged or high-risk trades.
- Upgraded margin calculators: showing real-time impact of positions post-SEBI updates.
- Educational drives: via Varsity and TradingQ&A forums, explaining how the new rules function.
Despite a temporary 18% decline in F&O turnover, Zerodha saw a 12% increase in equity delivery volumes and mutual fund SIPs, indicating a positive long-term shift in investor behavior.
Their founder, Nithin Kamath, noted in December 2024:
“These rules make trading less thrilling, but more meaningful. Our goal is to ensure clients stay solvent, not just excited.”
Conclusion
SEBI’s margin framework overhaul is not just regulatory fine-tuning; it’s a paradigm shift in how risk is managed in Indian capital markets. By tightening speculative loopholes and enforcing better collateral practices, SEBI aims to protect India’s rapidly growing base of retail traders from implosion.
While short-term pain is inevitable, especially for high-frequency traders, the long-term gains include greater market stability, institutional confidence, and a financially literate trader base that trades with discipline.
For brokers, traders, and the broader economy, it’s a regulatory evolution toward a more mature capital market landscape.
FAQs
- What is SEBI’s new margin rule in 2024?
SEBI increased the minimum contract size, enforced upfront margin collection, and added new risk measures like ELM to ensure disciplined and safe trading practices. - How does the new margin rule affect retail traders?
Retail traders now need more capital to trade in F&O, reducing speculative activity and encouraging responsible trading. - Why did SEBI reduce weekly expiry contracts?
To reduce volatility and prevent over-speculation in short-dated contracts that were being misused by traders for high-risk, low-probability trades.
4. What is Extreme Loss Margin (ELM)?
It is an additional 2% margin collected to cover potential losses during extreme market volatility, particularly in short options positions.
5. How are brokers like Zerodha responding to these changes?
They are updating tech infrastructure, educating clients, and promoting long-term wealth-building strategies instead of speculative trading.