Margin trading not behind recent market fall, says Kotak Securities' Ashish Nanda

Recent market volatility has revived debate around the role of margin trading facility (MTF) in amplifying equity market declines, with brokerage executives offering contrasting assessments of the risks involved. While some market participants have blamed MTF-linked selling for the recent correction, data and broker-level controls suggest the picture may be more nuanced.

Ashish Nanda, President and Digital Business Head at Kotak Securities, said speculation that MTF selling triggered the market decline is not supported by available data. He pointed out that National Stock Exchange data shows the overall MTF book actually increased marginally during the period when equities corrected, indicating there was no broad-based unwinding or forced liquidation of margin positions. According to Nanda, India’s total MTF exposure is around 0.23% of overall market capitalisation, a level he described as modest and significantly lower than leverage seen in markets such as the US and China.

Nanda said the structure of the MTF book further limits systemic risk. Exposure is spread across more than 2,000 stocks, with the highest exposure to any single stock at roughly ₹1,500 crore. This level of diversification, he said, reduces concentration risk and lowers the likelihood of disorderly selling triggered by margin calls. He also highlighted margin norms as a key safeguard, noting that while large-cap stocks typically require margins of around 20%, margin requirements rise sharply for mid- and small-cap stocks, reaching 45–50%, thereby curbing leverage in more volatile segments.

At Kotak Securities, Nanda said MTF is treated as a high-risk product and monitored with the same rigour as derivatives. Client-level exposures, stock-level concentration limits and overall risk thresholds are tracked closely, and credit assessments are conducted before allowing large positions. Exposure decisions, he added, are guided by internal risk policies rather than competitive pressures to offer maximum leverage.

MTF vs derivatives

Comparing MTF with derivatives, Nanda said options trading often involves significantly higher leverage and complexity. While both products carry risk, he argued that MTF is relatively easier for retail investors to understand, as it largely involves weighing borrowing costs against expected returns and allows smaller position sizes than derivatives. Nonetheless, he cautioned that MTF should be used judiciously and only by investors with the appropriate risk appetite, as losses can escalate quickly if markets move against positions.

A more cautious view has been articulated by Zerodha Co-Founder and CEO Nithin Kamath, who has warned that the rapid expansion of MTF across the industry may be outpacing risk controls. In a recent post on X, Kamath said MTF exposure has grown nearly fivefold over the past four years to more than ₹1.1 lakh crore, driven partly by higher margins and transaction costs in the derivatives market. Despite this growth, he argued that brokers lack robust, industry-wide risk models to manage the associated leverage.

Kamath highlighted that regulations permit leverage of up to five times on many stocks, and intense competition often forces brokers to offer the maximum permissible leverage. Unlike derivatives, he noted, MTF carries additional risk multipliers: positions are held for longer periods, a much wider universe of stocks—including illiquid names—is eligible, and trades are predominantly one-sided, with only buy positions. These factors, he said, complicate risk management, particularly during sharp market downturns.

He warned that when markets fall and liquidity dries up, forced selling can trigger cascading price declines. According to Kamath, current regulations are designed primarily to protect the financial system from broker failures rather than to shield brokers from client defaults. With MTF now at elevated levels, he cautioned that a major market shock could lead to synchronised liquidations, amplifying volatility across equities.

Together, the contrasting views underscore a growing debate on how MTF should be monitored as its footprint expands, even as brokers emphasise the need for disciplined use of leverage by retail investors.