Months after the Securities and Exchange Board of India (Sebi) moved to curb speculative trading in equity derivatives, India's largest discount brokers have doubled down on margin trading to diversify revenue and shore up bottom lines.
The shift comes amid concerns that the surge in leveraged cash-market positions in margin trading facilities (MTFs) may worsen selling pressure during sharp market corrections. Yet, instead of curbing the product as it did with derivatives, Sebi is proposing measures to strengthen the rapidly growing market.
India's MTF book, which lets investors buy shares using broker-funded loans, hit a record ₹1.27 trillion in May, up 65% year-on-year and 11% over April, according to CareEdge Ratings. The growth contrasted with futures and options activity, where the average daily turnover was largely flat sequentially, as a higher securities transaction tax and Sebi's earlier curbs weighed on speculative trading.
Cash market average daily turnover, by comparison, rose almost 6% sequentially in May, as expectations of easing tensions in West Asia revived retail participation. The divergence points to a growing preference among retail investors for leveraged cash-market investing, aided by burgeoning broker-led funding channels.
Beyond derivatives
"Regulatory changes have structurally capped the derivatives revenue model," said Nilesh Sharma, executive director and president at Samco Securities. "The discount broking industry has reached a saturation point in terms of generating direct revenue from client trading."
Against this backdrop, MTF has emerged as an attractive avenue to diversify revenue through recurring interest income while deepening customer engagement, said Pranay Aggarwal, director and chief executive officer (CEO) of Stoxkart, a discount brokerage firm.
To be sure, derivatives remain the biggest revenue driver for discount brokers. Market leaders Groww and Angel One derived 55% and 47% of their March quarter revenue, respectively, from equity derivatives broking, while MTF contributed only 7-7.5% for both firms.
But the segment is growing rapidly. Groww's MTF book jumped nearly five-fold year-on-year to ₹2,814 crore in Q4 of FY26 from ₹602 crore a year earlier, while Angel One's average client funding book rose 60% to ₹5,850 crore from ₹3,650 crore. Both brokers charge about 15% annual interest on MTF loans, with Groww also levying a brokerage of 0.1% of the order value.
Unlike brokerage income, MTF generates recurring interest income for brokers, as long as positions remain funded. This strengthens their profitability as derivatives volumes become less predictable.
Groww's net profit margin expanded to almost 45% in Q4 of FY26 from 36% a year earlier, while Angel One's rose to about 28% from 21%.
Wallet depth
Crisil Ratings observed in February that diversified brokers have weathered the post-regulatory slowdown better than firms dependent on transaction income, with MTF interest emerging as a cushion against weaker trading activity.
"The competitive metric is shifting from the size of the client file to the depth of the active wallet," said Karthick Jonagadla, smallcase manager, founder and CEO of Quantace Research.
In a tighter derivatives market, those who deepen relationships with customers through MTF, wealth management and loans against shares are likely to generate higher long-term average revenue per user than firms relying primarily on customer acquisition, Jonagadla said.
"MTF is an under-appreciated product," said Amit Majumdar, group chief strategy officer at Angel One. He said MTF is an important customer engagement tool rather than a derivative substitute, with investor education and prudent risk management underpinning its long-term expansion.
Groww declined to comment.
The catch
MTF, however, is not a risk-proof growth engine. During periods of heightened uncertainty, investors typically reduce leveraged cash positions first, while derivatives continue attracting trading activity, said Aggarwal of Stoxkart. That makes MTF earnings more sensitive to swings in market sentiment than derivatives-led revenue.
Jonagadla of Quantace Research cautioned that almost half of the industry’s MTF book is backed by relatively illiquid stocks which are not in the futures and options segment, potentially exacerbating selling pressure during sharp market corrections.
To mitigate these risks, brokers rely on stock-level exposure limits, continuous monitoring of eligible securities and well-collateralized funding books. Many also offer one-cancels-the-other orders, enabling investors to simultaneously set stop-loss and profit targets, helping automate risk management on leveraged positions.
Sebi appears focused on strengthening rather than restricting the ecosystem. In an 18 June consultation paper, the regulator proposed allowing brokers to fund MTF through listed non-convertible debentures, while retaining the 50% initial margin requirement and raising the minimum net worth threshold for MTF-offering brokers to ₹5 crore from ₹3 crore.
These proposals could expand MTF books by reducing reliance on bank funding and dispersing credit risk beyond the banking system, Samco's Sharma said.
"That's a significant structural equalizer for technology-driven discount brokers against bank-backed brokers who currently enjoy an edge in funding costs," Sharma said.