Do Not Call
Understanding how Margin Trading Facility and Loan Against Shares helps investors make informed decisions about leveraging their securities responsibly.
Investors often seek ways to optimise their portfolios by leveraging their existing securities. Two popular options available in India are Margin Trading Facility (MTF) and Loan Against Shares (LAS). While both involve pledging shares, their mechanisms, costs, risks, and use cases differ significantly. This article explores these two financing avenues to help you understand their characteristics and distinctions.
Margin Trading Facility is a method of leveraging capital by borrowing funds from a broker to purchase additional securities. It is regulated by SEBI and provided by registered stockbrokers.
MTF enables an investor to buy shares by paying only a part of the total transaction value upfront. The remaining balance is funded by the broker.
SEBI-registered stockbrokers provide MTF accounts to eligible clients. These services are typically accessible through demat and trading accounts.
When an investor opts for MTF, they place an order to buy shares but only pay a portion of the cost. The broker funds the rest. The shares are held in a margin account and remain pledged to the broker until the borrowed amount is repaid.
SEBI has issued circulars outlining eligibility norms, maximum leverage, interest rates, and reporting standards. Only approved stocks, as per SEBI and the broker's internal risk policy, are eligible for MTF.
Loan Against Shares is a form of secured lending where investors pledge shares as collateral in return for a loan. This type of loan is offered by certain banks and NBFCs as a secured lending facility. Under LAS, investors pledge their equity holdings with a lender who extends a loan based on the market value and the lender's Loan-to-Value (LTV) ratio. Only listed shares from approved scrips are accepted. LTV typically ranges from 50% to 70%, depending on the lender's policy and SEBI guidelines. The Reserve Bank of India (RBI) and SEBI have laid down guidelines for margin requirements, eligible securities, and exposure limits. Lenders must comply with Know Your Customer (KYC) norms and maintain adequate disclosures.
Refer the folllowing table -
Parameter |
Margin Trading Facility (MTF) |
Loan Against Shares (LAS) |
|---|---|---|
Purpose |
Leverage for buying stocks |
Loan for personal or business needs |
Ownership |
Shares held by broker |
Shares remain in investor's demat |
Interest Rates |
Higher (daily accrual) |
Lower (monthly basis) |
Risk of Liquidation |
Higher; daily monitoring |
Moderate; margin calls are less frequent |
Usage |
Active trading |
Passive funding |
Regulation |
SEBI |
RBI, SEBI |
Eligibility |
Trading account with broker |
Demat account, approved securities |
LTV Ratio |
Up to 80% (varies by broker) |
50%–70% (varies by lender) |
The table above summarises the primary differences in approach, usage, and risk between Margin Trading Facility and Loan Against Shares.
Note: The examples and comparisons provided in this table are for illustrative purposes only and do not constitute investment advice. Always consult with a financial advisor before making any investment decisions.
Margin Trading Facility and Loan Against Shares are both mechanisms to leverage equity holdings but serve distinct purposes. Understanding the structures, risks, and use cases of both MTF and LAS can help investors evaluate which option best suits their financial situation.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Sources
Securities and Exchange Board of India (SEBI): https://www.sebi.gov.in/
Reserve Bank of India (RBI): https://www.rbi.org.in/
National Stock Exchange (NSE): https://www.nseindia.com/
Bajaj Finserv: https://www.bajajfinserv.in/
MTF stands for Margin Trading Facility. It allows investors to buy shares by paying a part of the amount while the rest is funded by the broker.
Yes, both services charge interest. MTF usually accrues interest daily, while LAS generally applies monthly interest.
Yes, provided your account meets the respective eligibility requirements and regulatory norms.
MTF is regulated by SEBI, while LAS is governed by both SEBI and RBI depending on the service provider.
In MTF, the broker may liquidate your pledged shares to cover the shortfall. In LAS, lenders may invoke the pledge and sell the shares after notifying the borrower.
