A margin penalty serves as a financial consequence for failing to maintain the required collateral (margin) in your trading account. Exchanges mandate sufficient margin levels for every trade to ensure adequate risk coverage in case a trade goes against you and you accrue a significant loss. This leads to a margin shortfall that occurs when the required margin exceeds the available funds in your account, triggering potential penalties.

There are two types of margin penalties that exist as per SEBI regulations:

• Upfront margin penalty: This penalty applies when a trader attempts to initiate a trade without possessing the upfront margin amount stipulated by the exchange. For instance, if a trade requires a minimum margin of ₹1.1 lakh but the trader only has ₹1 lakh, the ₹10,000 shortfall incurs the penalty.
• Non-upfront margin penalty: This penalty applies when a trader fails to fulfill the ongoing margin requirements after executing a trade. Examples include failing to top-up MTM losses in futures contracts by T+1 or not meeting ad-hoc margin calls due to market volatility. Unlike upfront penalties, non-upfront penalties appear on the fund statement T+6 days after the reporting deadline of T+5.