Pledge and collateral margin on Zerodha

The pledge and collateral margin mechanism on Zerodha allows investors to use their demat account holdings, including equity shares, ETFs, and mutual fund units, as margin collateral for trading in the F&O segment, equity intraday (MIS), currency derivatives, and commodity derivatives. Instead of selling investments to fund margin requirements, investors pledge their holdings to Zerodha, which in turn re-pledges them to the clearing corporation as collateral. The holdings remain in the investor’s demat account at CDSL in a pledged state (encumbered but not transferred).

This mechanism was significantly reformed following SEBI’s circular SEBI/HO/MIRSD/MIRSD_RTAMB/P/CIR/2020/207 (November 2020), which prohibited brokers from using client securities as collateral through a Power of Attorney (POA) and mandated an explicit pledge-based system.

Regulatory framework

SEBI pledge mechanism (post-2020)

SEBI’s 2020 circular eliminated the practice of brokers maintaining a blanket POA over client demat accounts to use client shares as collateral. Under the new framework:

1. Clients must explicitly pledge each security to the broker.
2. The broker then re-pledges the security to the clearing corporation (NCL for NSE, ICCL for BSE).
3. Margin benefit is provided to the client only after both the pledge and re-pledge are completed.
4. When the client wishes to trade using pledged securities as margin, the broker routes F&O or other margin orders against this collateral.

This framework ensures that:

• Client securities are not misused by brokers.
• The clearing corporation has direct security interest in the collateral.
• Client can track the pledge status on CDSL’s website independently.

SEBI Peak Margin framework

As discussed in the equity segment article, SEBI’s Peak Margin rules (effective September 2021) require that peak collateral usage during the trading day not exceed available margin at the start of the day. Pledged collateral counts toward the margin available at the start of the day.

How pledging works on Zerodha

Step 1: Initiate pledge request

The investor logs in to Kite or Console and navigates to the Margins section. The investor selects securities to pledge from their demat holdings and specifies the quantity. Eligible securities include:

• Equity shares in the SEBI-approved collateral list.
• ETF units (Nifty BeES, Liquid BeES, gold ETFs, etc.).
• Mutual fund units held in demat form (via Coin).

Step 2: CDSL OTP authorisation

CDSL sends a One-Time Password (OTP) to the mobile number and email registered with the demat account. The investor enters this OTP to authorise the pledge request. This OTP-based authorisation replaces the older POA mechanism and provides a clear audit trail of investor consent.

Step 3: Re-pledge to clearing corporation

Once the investor authorises the pledge, Zerodha re-pledges the securities to the clearing corporation (NCL or ICCL). After successful re-pledge, the margin credit appears in the investor’s Kite margin dashboard, typically within 30 to 60 minutes on a working day.

Step 4: Using pledged margin

The pledged collateral (after haircut) is available as collateral margin. This margin can be used for:

• NRML F&O positions (futures and options writing).
• Intraday MIS positions in equity and derivatives.
• MTF margin requirement (up to permitted limits).

Cash component requirement: SEBI requires that a minimum of 50% of F&O margin (SPAN + Exposure) be met in cash or cash equivalents. Non-cash collateral (pledged shares) can meet the remaining 50%. If only non-cash collateral is available (no cash), the broker may levy a penalty (Peak Margin shortfall) if the cash minimum is not maintained.

Haircuts on pledged securities

A haircut is the percentage deduction applied to the market value of pledged securities to arrive at the margin available to the client. Haircuts reflect the risk of a security becoming illiquid or declining sharply before the broker can liquidate it.

SEBI defines minimum haircuts for different categories of securities. Zerodha applies haircuts that are at least equal to SEBI’s minimums and may be higher based on its own risk assessment.

Haircuts are subject to revision by SEBI and by Zerodha’s RMS team, particularly during periods of high market volatility.

Cash component and collateral margin

SEBI distinguishes between two types of collateral:

1. Cash equivalent: Cash balances, Liquid BeES (treated as cash equivalent), and fixed deposits pledged in favour of the broker. These meet both the cash and non-cash margin requirements.
2. Non-cash collateral: Pledged equity shares and equity mutual fund units. These can meet only up to 50% of the total margin requirement.

Practical example:

• Total NRML F&O margin required: Rs 1,00,000.
• Cash component minimum (50%): Rs 50,000.
• Non-cash component (remaining 50%): Rs 50,000.
• Client has: Rs 20,000 cash + Rs 1,00,000 worth of pledged shares (after haircut 30% = Rs 70,000 margin).
• Cash shortfall: Rs 50,000 - Rs 20,000 = Rs 30,000 shortfall in cash component.
• Despite Rs 70,000 non-cash margin available, the cash component shortfall means only Rs 70,000 of combined margin is usable, and the client may face peak margin penalties.

Pledging mutual fund units (Coin holdings)

Mutual fund units held in demat form through Zerodha’s Coin platform can be pledged using the same CDSL OTP-based mechanism. Large-cap equity fund units and overnight/liquid fund units are accepted. The haircut for equity mutual fund units is determined by Zerodha’s RMS based on the fund category and NAV volatility.

Unpledge process

To release pledged securities (e.g., to sell the pledged shares or move them to another broker):

1. Investor submits an unpledge request through Kite or Console.
2. Zerodha initiates the re-pledge release at the clearing corporation level (typically processed after trading hours).
3. CDSL removes the pledge lien from the investor’s demat account.
4. Unpledge is typically completed within 1 to 2 working days.

The investor cannot sell pledged securities directly; the securities must be unpledged first. However, if the investor wishes to sell pledged shares to fund a redemption, Zerodha’s platform facilitates a simultaneous unpledge and sell workflow.

Pledge for MTF

In the Margin Trading Facility (MTF), shares bought on margin are automatically pledged to Zerodha as security for the loan. This is a different use of the pledge mechanism from the investor-initiated pledge described above. In MTF:

• The investor pledges their own existing holdings as margin contribution.
• The MTF-funded shares are separately pledged (re-pledge to clearing) by Zerodha upon purchase.
• Both pledges must be released before the shares are fully free.

Corporate actions on pledged securities

Dividends

Dividends declared on pledged shares are credited directly to the shareholder’s bank account registered with the demat account. Pledging does not affect dividend entitlement.

Bonus shares

Bonus shares credited on pledged securities are credited to the demat account but may be automatically pledged to maintain the collateral ratio, depending on Zerodha’s collateral agreement terms. Investors should check Zerodha’s terms for bonus share treatment on pledged holdings.

Rights issue

Rights entitlements (RE) are credited to the demat account as a separate ISIN even for pledged shares. The investor can apply for the rights issue using the RE units by funding the application separately. Rights shares, once credited, may need to be pledged separately if the investor wishes to use them as margin.

Voting rights

Investors retain voting rights on pledged shares. Pledging under the SEBI framework does not transfer voting rights to Zerodha.

Charges for pledge and unpledge

Common operational considerations

Pledge timing

Pledge requests submitted before the end of the trading day are typically processed by the next trading morning. Investors who wish to use pledged collateral for next-day trading should submit pledge requests at least one day in advance.

Securities in close-out list

Securities that SEBI or Zerodha’s RMS has restricted (e.g., placed under a trade-to-trade segment, F&O ban, or special supervisory measure) may not be accepted as collateral or may attract higher haircuts. Zerodha publishes the list of restricted securities for collateral purposes.

Using Liquid BeES efficiently

Liquid BeES (Benchmark Exchange Traded Scheme, Liquid) is unique in being classified as a cash equivalent with a low haircut of 10%. For investors who want to park short-term cash and simultaneously use it as F&O margin, Liquid BeES is the most capital-efficient collateral. The investor buys Liquid BeES (which earns approximately the overnight rate), pledges it, and uses 90% of its value as margin.

References

1. SEBI Circular SEBI/HO/MIRSD/MIRSD_RTAMB/P/CIR/2020/207, Pledge and re-pledge framework.
2. SEBI Circular SEBI/HO/MIRSD/MIRSD_RTAMB/P/CIR/2021/583, Peak Margin framework.
3. CDSL, Pledge and re-pledge operational procedures.
4. NSE Clearing Limited, Collateral eligibility and haircut schedule.
5. SEBI, Margin requirements for equity and derivatives segments.