Margin Penalty Calculation Clarification

Hey Jason,

The Exchanges collect penalty from the Broker collectively for all clients and not client-wise, so it’s almost impossible to share a receipt/acknowledgement from the Exchange for the penalty you have paid. As a Broker, we’re acting as a pure agent, whereby we’re collecting the penalty and passing it on to the Exchange. We get a csv file from the Exchange daily indicating clientwise penalty which we use to post the debit on the client ledger.

How do you trust that the penalty is paid?

The Brokerage Industry is one of the most heavily regulated Industries. All Brokers are subject to multiple audits - both Internal audits (done half yearly) & External audits (carried out by the Exchanges & SEBI). The scope of this audit includes carrying out checks to ensure a Broker isn’t misusing client funds including charging penalty and not passing it on.

Also, the circulars from the Exchange explicitly mention the rate of penalty for margin shortfalls. Our team must have already shared you the basis of shortfall which is why the penalty was applied. For the lack of a better example and don’t mistake me: Say, the speed limit on a stretch of road is 80kmph, and you’re driving at 100kmph. The speed guns catch you for over speeding and we’ve produced an image of your car over speeding. In such a case, fine for over speeding is charged and you’re bound to pay.


Now this is what exactly I was looking for. Thank you for your answer. It was worth the wait.

I would like to add a little more.

I had earlier asked how is GST invoice a proof for payment of penalty.
Now let me only answer from whatever explanation you have given. Since you have raised a GST invoice, you have to show it in your books of accounts as penalty collected. And now I know there is SEBI audit, the auditors will report if you have not paid an equivalent amount to the exchange.
I hope I interpreted this rightly.

Rest of the part I had always understood. My shortfall was only because of increased volatility and it didn’t make sense to me, because when I took the position I had enough margin. A lot of confusion on this regard but now I have learnt from my mistakes. I have to maintain 10 percent of funds utilised as buffer.

You’re right. We’re asked for our ledgers for the period we’re being audited. The penalty ledger ideally shouldn’t show any credit balance, since both penalty collected {from client} and paid {to Exchange} are recorded on the same ledger.

Justified. Thank you.

I have one more doubt. But I will solve it myself. Applicability of GST on penalty since you are acting as a pure agent. I know there are few exemptions when the services are provided as a pure agent. But will have to check specifically for a stock broker as to how that works.

Editing to answer my own query:
If you are a pure agent, you shouldn’t be charging GST as per the Rule 33 of the CGST Rules 2017
But I see a problem here. The exchange is charging GST on the said penalty, and you are merely passing it on the client.
So whether exchange can impose penalty? This is a litigated subject and courts are giving contrary views in different cases. So its better I rest my case.

Thank you for all the clarification. @VenuMadhav

With the new rules, Zerodha should notify the user before the margin utilization goes beyond the threshold. Right now Zerodha is sending the SMS/email after margin utilization has gone over the limit. And that is too late because the trader would have incurred the penalty by then.

When Nudge was first released, I was expecting that this would be its primary feature… Hope it gets added soon so that crores of retailers’ money can be saved.

One more solution I could think of. Zerodha should separately keep extra margin when we take the position itself. So margin utlised may go negative in our account as per zerodha but it will actually still be positive as per exchange.

Example: Lets say 1lakh margin is required to take a position. Let Zerodha block additional 10 percent as safety margin. So 1,10,000 would be required. Now when available cash goes negative there would be Nudge for balance going negative. But short penalty wont be imposed since as per exchange it is still positive. I have given an example of 10 percent, but may be 5 percent would also give us enough time to change our positions.

Few may have other views, so this is up to client to decide. But in future if we are seeing more complaints on peak penalty as you said we may ask 5 to 10% more based on clients feedback.

I feel its in the best interest of the client.
I have seen other features in zerodha which are not really required as per regulatory. I Have seen so many complaining about not allowing CNC for stock options. But if one sees the bigger picture, its in the best interest of the client.
We have to anyways keep 5 percent at least in our account for intra day volatility. If by default if its blocked, it would be really beneficial.

Another alternative I would think of is have a feature where client decides how much additional margin he would want o be blocked in terms of percentage. This is similar to how credit cards limits which can be set in mobile applications or how we can set different limit to different beneficiaries when we add beneficiaries in net banking. We ourselves will be able to set it.
Again, technically I do not understand how difficult would it be to implement.

Nah, please don’t do this…

A lot of nudges/features which you have implemented seem more of a hindrance than being useful. Just let things be, if traders/investors can’t make wise decisions, that’s on them, can’t hold hand on everything…

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We don’t, just in case if many clients requested in future, anyhow will check if we can give option to users to choose, don’t think this is possible but will try.

I found a solution to my own problem.
What I will do is I will place a buy order of niftybees 10 percent lower at 9.15 depending on how much amount I want to block for the day.
So if my 10 percent is 10Lakhs, I will place a buy order to the value of 10Lakhs. Zerodha will deduct this from my balance right away even if its not executed. The moment, my cash goes negative because of intraday volatility, I will get a msg from Zerodha that I have exceeded the available cash. But as per exchange since the buy order isn’t executed, I will not be charged penalty.
Will this work @siva ?

Believe this should be okay.

Can anyone let me know how to find the CPIN? It is not available in the invoice downloaded from Console.
@siva : Have been waiting for this from 5 days.

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Not sure, you tried checking with CA?

No. I haven’t. Not sure whether CA would be aware of this.

Can I get the screenshot of margin exceeding funds available for my trading account on the day when penalty is applied?

Guess that is not possible, can check this.

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I read Venu’s reply couple of days back. So, I am just asking what Venu said his team shared with Jason. “Basis of shortfall on which penalty is applied” and “we have produced an image of your car overspeeding”.

It’s just normal calculations typed out.

You can do it yourself if you know the penalty amount. Reverse calculate. Reduce GST. And then gross up the amount by dividing by 1percent.

CPIN is generated when GST is paid. I do not think its of much use to you.

If its a B2B invoice then you can check it in your portal. But since this is in the nature of B2C, there is no way you can track the payment made by them to the tax authorities.
All that you have to do in this case is believe the invoice is genuine.

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There should be some way but not yet …