Margin Shortfall Penalty is levied in Equity Derivatives and Currency Derivatives segments if sufficient margins are not maintained in client trading account. This Penalty is applicable for positions taken in Futures and Options Segment and Kept open over night.
This margin shortfall penalty mechanism is applicable to the stock and currency exchanges under SEBI (NSE, BSE, MCX-SX and MCX). In brief, the answer to what is margin shortfall penalty, it is a penalty levied on over night positions held in trading account without sufficient margin as prescribed by exchange.
How Margin Shortfall Penalty is Calculated?
If Short-collection/non-collection of margins per client per segment per day is (< Rs 1 lakh) And (< 10% of applicable margin) then a penalty of 0.5% is levied on such shortfall or non collection per EACH DAY.
If Short-collection/non-collection of margins per client per segment per day is (≥ Rs 1 lakh) Or (≥ 10% of applicable margin) then the margin short fall penalty is 1.0% per EACH DAY of such shortage.
Important point to note is for levying 0.5% penalty, shortfall should be less than one lakh AND it should be less than 10% of applicable margin. If either shortfall of derivatives margin is more than 10% OR more than 1 Lakh then the penalty for margin shortfall will be 1%. To explain further, unless the shortage in margin is less than 1 Lakh Rupees and Less than 10% of required margin, 1% penalty is levied. Such penalties are to be collected by exchanges with in 5 days from brokers. All the amount collected as such penalty will be deposited to Investor Protection Fund by all exchanges.
There is more dent to the pockets of traders if such shortfall / non collection continues for more than 3 consecutive days then the penalty for such shortfall will be 5% EACH DAY beyond third day of shortfall. Even if it is not for 3 consecutive days, it should not be more than 5 days in any month. If more than 5 shortfall days occurs in a month, even they are non consequent days, a penalty of 5% is levied.
To illustrate margin shortfall penalty with example, consider this.
If a trader takes overnight position in a Future contract X for which margin is 1,00,000. Available credit in the trading account is 50,000. For a shortfall of 50,000 a penalty of 1% is levied. Although shortfall is less than 1 Lakh, it is more than 10% shortage of required margin (0.5% is applicable only if shortfall amount is less than 1 Lakh and less than 10% of applicable margin). So for every shortage day trader’s account will be debited 500 (50000*1%). If shortage continues for 3 consecutive days then from 4th day the penalty will be 2500 per each day (50000*5%).
If trader closes a position after 4 days and shortfall occurs again in the same month then from 6th short fall day (The simple way is to count number of shortfall days in the month) trader needs to pay a margin shortfall penalty of 2500 per each day (Assuming the shortfall continues to be 50000).
Exemption of Margin Shortfall Penalty
Only exemption from margin short fall penalty is, if short collection of margin from clients is caused due to movement of 3% or more in the index (close to close value of Nifty/Sensex for all equity derivatives) and in the underlying currency pair (close to close settlement price of currency futures, in case of all currency derivatives) on a given day, (day T), then, the penalty for short collection shall be imposed only if the shortfall continues to T+2 day.
As per recent SEBI Circular on Margin shortfall, it is mandatory to collect the Mark 2 Market (M2M) losses for T day positions on T+1 day from the clients. Failing which, the same also considered as margin short fall and the penalty is levied as per above percentage.
Further, Brokers are required to upload the margin details to exchange within T+5 days time considering the cheques are issued by the clients on T-1 day and T Day are credited into the broker account. If any cheque payment is bounced, brokers are required to submit the revised margin collection report to the exchange within T+5 days and exchange consider the last file submitted by the broker and levies the short fall penalty for the respective clients' account which is passed on to the client accounts on T+6 date.
For more details see attached SEBI circular and FAQ on margin shortfall penalty.