Zerodha founder and CEO Nithin Kamath has flagged record margin trading facility (MTF) exposure as the most significant risk currently facing the brokerage, warning that a sharp market correction could trigger waves of forced selling — particularly in small- and mid-cap stocks — as leverage continues to build across the Indian stock market.

Kamath's caution comes amid growing concerns about the rapid expansion of margin trading in India's equity markets. MTF allows investors to purchase shares by paying only a portion of the total transaction value upfront, with the brokerage financing the remainder against collateral. Unlike intraday leverage, which is squared off within the same trading session, MTF positions can be carried overnight or for extended periods, meaning that leveraged exposure accumulates rather than resetting daily. While the facility amplifies potential gains, it equally magnifies losses, and brokers are required to liquidate positions if the value of collateral falls below prescribed maintenance levels.

India's markets regulator, the Securities and Exchange Board of India (SEBI), permits registered brokers to offer MTF subject to strict regulatory guidelines, including margin maintenance requirements and limits on the stocks eligible for leveraged trading. SEBI has been progressively tightening leverage in Indian equities in recent years, having implemented phased upfront margin requirements for intraday trades starting in late 2020, a reform that significantly altered trading patterns. Despite these and other guardrails, industry data has shown a steady rise in MTF volumes in recent periods, reflecting the broader surge in retail participation — tens of millions of new demat accounts have been opened in India over the past few years — and a growing appetite for leveraged positions.

Kamath cautioned that a sudden downturn in equity prices could set off a chain reaction: as collateral values decline, brokers would be forced to sell pledged shares to meet margin calls, which in turn could intensify downward pressure on stock prices. This dynamic is especially pronounced in small- and mid-cap segments, where lower liquidity means that forced sales can have a disproportionate impact on prices. Indian small- and mid-cap indices have experienced strong runs that have drawn significant retail interest, raising questions about whether valuations in these segments are sustainable if leverage-driven demand were to unwind rapidly.

Zerodha, founded by Nithin Kamath in 2010, is one of India's largest discount brokerages by active client base. The Bengaluru-based firm has previously advocated for prudence in retail investing and has implemented various risk-management measures on its platform. Kamath has been a prominent voice on market risks, having previously spoken publicly about the dangers of speculative trading behavior among retail investors.

The broader Indian equity market has seen significant retail inflows, and the accumulation of leveraged positions through MTF has emerged as a key area of concern among market participants and observers. SEBI has periodically reviewed margin-trading rules to balance investor access with systemic risk mitigation, and the trajectory of MTF exposure is likely to remain a focus for the regulator as it assesses stability in one of the world's fastest-growing retail equity markets.

Source: CNBC-TV18