When you buy Equities, you are actually paying cash and this cash has to be paid to the seller of the shares.
For eg: When you buy Reliance shares worth Rs.85,000 you would receive the shares and the seller of these shares would receive actual cash as sale proceeds.
However when you trade F&O, only margins are blocked. So if you sell one lot of Nifty, the Exchange levies margin on your account and similar margins are levied on the buyer also. There is no cash exchange that happens for positions you take in the F&O segment.
When a broker takes your shares he’s giving you margins and not ‘cash’. So you cannot buy Equity shares because as mentioned earlier you’d have to pay cash to the buyer of the shares. Since the broker only gives you margins, you can utilize such margins only to take F&O positions. If a broker allows you to take Equity positions from collateral margins, he is basically involving himself in client funding and would have to report the same to the Exchange.
Note: Difference between margins and cash is, that margins are trading limits, while cash is your actual cash balance which can be withdrawn.
Assume your trading limits are set as Rs.4,15,000/- , out of this your cash component can be only Rs.1,15,000/- The remaining Rs.3,00,000/- could be Collateral margins. You could buy Equity shares only for Rs.1,15,000.