Margin calls explained: how borrowed money made this week's small-cap fall worse

What is a margin call?

It is a broker’s demand for more money from a client whose borrowed position has lost value.

When you buy shares partly with a broker’s money, the shares themselves usually serve as the security for that loan. The broker requires you to keep a minimum cushion of your own money in the account. If prices fall and that cushion shrinks below the required level, the broker asks you to top it up, with cash or more shares. That request is the margin call. If you do not meet it in time, the broker sells your shares to recover its loan.

What happened in the markets this week?

Shares of smaller companies fell much harder than the benchmarks, and market experts blamed forced selling.

On Friday the Nifty Smallcap 100 fell as much as 3.8% to 17,571.60, taking its loss for the week to 7.4% and leaving it more than 10% below its 52-week high. The Nifty Midcap 100 dropped 3.2% and is over 12.9% below its peak. The Sensex and Nifty 50 fell less than 1%.

Independent market expert Ambareesh Baliga said the sell-off “is not about the valuations, and more about margin calls, which have been hitting retail investors.” Others also pointed to money moving to the Jio Platforms share sale, foreign selling and oil above $110 a barrel.

How does borrowing to buy shares work in India?

Mostly through the margin trading facility, a regulated loan from brokers.

The Securities and Exchange Board of India introduced the margin trading facility, or MTF, in 2004 and overhauled it in 2017. A broker pays part of the price of the shares; the client puts up the rest and pays interest on the loan for as long as the position is held. Rates differ from broker to broker.

Only shares and equity exchange-traded funds in the exchanges’ Group I, the most liquid category, can be bought this way. The client’s minimum contribution is set by a formula based on how volatile the stock is. In a worked example in a SEBI paper in June, it came to 20% of the purchase: a client putting in ₹10,000 could hold ₹50,000 of shares. Positions are valued every day at market prices.

Why do margin calls make a fall worse?

Because the selling they force can push prices down further, triggering more calls.

SEBI calls this wrong-way risk. When the shares bought with the loan are also the security for it, a fall in price hits both at once. The client’s money is wiped out faster, and the broker’s security is worth less at the very moment it needs it.

The effect is strongest in smaller companies, where fewer shares change hands. If many leveraged traders hold the same stocks, forced sales can overwhelm buyers. When a stock hits its lower circuit, the daily limit on how far it can fall, trading can freeze, and neither the client nor the broker can get out.

How big has margin trading become?

Very big, and much of it is in the riskier end of the market.

The NSE’s outstanding MTF book stood at ₹1,22,151 crore on 15 May 2026, having grown sharply since 2020, and roughly half of it was in stocks that are not traded in the futures and options segment. Those tend to be smaller and less liquid companies.

Nithin Kamath, co-founder of the broker Zerodha, warned in May that “if markets crash, brokers could end up holding losses from MTF positions they can’t exit.” He has also said his firm’s own book is about ₹9,000 crore, and that “in terms of pure risk, MTF is by far the biggest risk we have taken since we started in 2010.”

Who carries the loss if the selling cannot keep up?

First the trader, then the broker.

The client loses their own money first. If prices fall so fast that the shares sell for less than the loan, the client still owes the broker the difference. If they cannot pay, the broker bears the loss. That is why SEBI caps how much brokers may lend: today their total MTF borrowing may not exceed five times their net worth, and no single client can account for more than 10% of a broker’s maximum exposure. From July 2026, bank loans to brokers for this business must be fully secured by cash, cash equivalents and government securities, at least half of it in cash.

Is SEBI changing the rules?

It has proposed changes, though they are aimed more at plumbing than at cutting leverage.

In a consultation paper on 18 June 2026, SEBI proposed raising the minimum net worth for brokers offering MTF from ₹3 crore to ₹5 crore, an overall limit of 5.5 times net worth, a uniform rights and obligations document for clients, and a 30-day window to rebalance when a stock drops out of Group I. It kept the higher margin for positions where a client’s cash funds the purchase and the shares become the security. A separate review of which stocks qualify is due.

For investors, the lesson of the week is an old one. Borrowed money multiplies gains on the way up and losses on the way down, and in a falling market it is the broker, not the investor, who decides when to sell.