Technically brokers can’t ask clients to square off a position just because their systems can’t handle the settlement through physical delivery. It’s not in the spirit of the circular issued by SEBI.
The reason we insist on additional margins is that in the eventuality that the position you are holding has to be settled by way of receiving/giving physical delivery, sufficient margins are available in the account to cover for such positions. Also, the margins are charged incrementally and not levied one shot.
About giving margin benefits in specific cases, there are some changes our OMS vendor has to make which with whom we’re in touch with. Post that, hopefully, you’ll receive benefits for all such delta-neutral strategies.