Margin Pledge vs MTF Pledge - Key Differences Explained

Have you ever wanted to buy more stocks than your available capital fund? If yes, then you are not alone. Many traders use financial tools that let them borrow against their existing investments. In such cases, the two common ways are the Margin Pledge and the MTF (Margin Trading Facility) Pledge, which come into play. 

At first glance, they might seem similar, but they are different concepts that serve the same purpose: to buy more stocks through collateral when your capital is limited. 

In this article, we break down the differences between Margin Pledge and MTF Pledge and will also understand their meaning, charges, pros, cons, and more 

What is Margin Pledge

Margin Pledge is a process that allows traders and investors to use their existing stocks as collateral to avail a loan and make use of the additional limits. In other words, it is also termed as a Stock Pledge. 

Features of Margin Pledge

• Leverage: Margin pledge allows investors to use their demat account holdings as collateral to access additional funds for trading.

• Increased trading capacity: By using margin pledge, investors can make trades that they could have done with their own capital alone.

• Flexibility:  It can be used for various trading activities like equity delivery, intraday, futures, and options. 

How Does Margin Pledge Work

Let’s say you have shares worth Rs 1,00,000 in your demat account, and you need margin to trade. If the haircut on those shares is 20% (which acts as a safety buffer for the broker), you will receive Rs 80,000 as usable collateral.

This pledged margin can now be used to trade in equity delivery, intraday, or F&O segments, without needing to bring in additional cash.

Now you can use this margin in 3 ways for intraday, equity delivery, and F&O:

1. Intraday: For intraday trading, you can use the entire Rs 80,000 of the collateral since the positions are squared off on the same day.

2. Equity delivery: In equity delivery trading with an 80,000 collateral pledge, you can purchase stocks through intraweek orders on Rupeezy, which will be held for a period of T+5 days. Here, if you want this position to be converted to delivery, you will be required to deposit cash, which is equal to the position that you have entered into. 

3. F&O: In F&O trading, the cash margin required must match the collateral used for trading. For example, if you use 70,000 of your 80,000 collateral, you need to maintain an additional 70,000 in cash. If you do not have the required cash, Rupeezy will provide the necessary funds at an interest rate of 0.03% per day.

In all the above cases, if you are in profit when the above positions are liquidated, those profits will be credited to your demat account. But if in losses, the total loss amount will be deducted from the total collateral available. 

For example, if your losses are Rs 4,000, it would be deducted from your collateral of Rs 80,000, and the available funds that you would have for trade are Rs 76,000. Furthermore, these losses need to be settled by the client within the prescribed date recommended by brokers, after which you will be charged an interest of 13% p.a. 

If these losses are not settled in the form of cash within the prescribed time, the shares that you have placed as collateral will be sold off in proportion to your losses. 

What is MTF Pledge

MTF means Margin Trading Facility, which is an investment tool that allows investors to access additional funds for their trading activities. In this arrangement, the investor contributes a portion of the capital, while the remaining amount is financed by the stockbroker. When using this investment strategy, a Margin Trading Facility (MTF) Pledge is required. 

An MTF Pledge is a compulsory process where the shares bought with the help of MTF must be pledged as collateral to the broker, in accordance with SEBI guidelines. 

Features of MTF Pledge

• Mandatory process: Shares that are purchased using MTF are considered to be the collateral for the portion of money that the broker has facilitated for the margin trade. 

• Triggered After Purchase: The pledge process is initiated after the shares are bought under MTF and they are credited to your demat account (typically T+2 days).

• Auto Pledged: Rupeezy offers an auto-pledge feature where you consent to pledging at the time of placing the MTF order, and we handle the backend process.

How Does MTF Work

When you purchase shares through the Margin Trading Facility (MTF) on Rupeezy, the pledging process is handled automatically for your convenience. Once the shares are credited to your demat account, typically by T+2 days, Rupeezy will seamlessly pledge them on your behalf. You are not required to manually initiate or confirm the pledge via an OTP link from the depository.

This streamlined process ensures full regulatory compliance while securing the broker’s funding, without requiring any further action from your end after placing the MTF order.

Margin Pledge vs MTF Pledge

While both Margin Pledge and MTF Pledge offer leverage opportunities, they differ significantly in various aspects. The table below highlights the core differences between the two concepts. 

Advantages and Disadvantages of Margin Pledge

Like any financial tool, the Margin Pledge also comes with its own advantages and disadvantages. Let us look at them below.

Advantages:

• Liquidity access: You can unlock funds without liquidating your investments, allowing you to retain ownership and benefit from potential future gains. 

• Opportunity: It enables immediate access to funds for investing in new opportunities.

• Tailored loans: Promoters often receive customized financing options based on pledged shares’ value and company performance. 

Disadvantages:

• Margin risk: If the value of the pledged shares drops, you may face a margin call, requiring additional collateral or urgent repayment.

• Asset loss: Non-repayment of the loan can result in brokers selling your pledged shares, causing a permanent loss of those assets. 

• Control dilution: For promoters, forced sale of pledged shares can reduce their ownership, which affects the control in the company. 

Advantages and Disadvantages of MTF Pledge

Now that we have understood the pros and cons of Margin Pledge, let us understand the advantages and disadvantages of MTF Pledge, which are mentioned below.

Advantages:

• Buying power: MTF allows you to trade in larger quantities or buy high-value stocks with limited funds. 

• Repayment period: Unlike fixed-term loans, you can hold the shares as long as you maintain the required margin and pay interest regularly. 

• Average down: It allows you to average your position when the stock price drops, even if you do not have full funds. 

Disadvantages: 

• Interest charges: Interest rate will be applicable and charges on the borrowed amount every day.

• Margin calls: If the stock price drops, you may be forced to add more margin or face the auto-sell of pledged shares. 

• Stock access: Not all stocks are eligible under MTF, because of which you can only use it for selective securities as per SEBI and the broker’s list. 

Regulatory Compliance and SEBI Guidelines for Margin Pledge

Based on SEBI’s circular dated February 25, 2020, here is a list of the guidelines specifically related to Margin Pledge.

1) Margin pledge mandatory for collateral:

Trading members and clearing members can accept client securities as margin only through a margin pledge created in the depository system. Off-market transfers or title transfers of securities are no longer permitted as collateral. 

2) Title transfer and Power of Attorney (PoA) are not valid:

Earlier practices like title transfer of securities or reliance on Power of Attorney (PoA) to collect margins are now prohibited. Holding PoA alone does not equate to valid margin collection.

3) Use of designated demat accounts:

Brokers need to separately open a demat account tagged as ‘Client Securities Margin Pledge Account’ to receive pledged securities. No other account types can be used for margin collection. 

4) Client-Initiated Pledge Instruction:

The client must initiate the margin pledge through either a physical instruction or an electronic mechanism, such as SPEED-e, specifying client details, broker ID, and segment. 

5) Margin Pledge via POA (with restrictions):

If the client has granted a PoA, the broker can initiate the pledge on their behalf, but an explicit consent from the client (including for re-pledge) is still required. This will usually be confirmed via OTP or other verifiable methods.

6) Pledge confirmation required: 

The Depository Participant (DP) will treat the pledge as ‘pending’ until the client confirms it, which is typically done through OTP on the registered mobile number/email.

7) Clear identification of pledged securities:

Each security in the client’s demat account must clearly show its pledge status and the party in whose favour it has been pledged, i.e., Trading Member or Clearing Member.

8) Pledge release process:

Clients can request the release of pledged securities, and brokers may do so after the risk and exposure checks are done. 

9) Dispute resolution responsibility:

Any disputes between clients and brokers regarding margin pledge must be resolved through arbitration under the depository bylaws, as SEBI and clearing corporations are not liable for this.

10) Applicable to all dematerialised securities:

These rules apply to all demat securities given as collateral/margin, ensuring uniformity across the system. 

When Should You Use Margin Pledge?

Here are some of the scenarios where Margin Pledge becomes handy to many investors and traders. 

1) To Trade in F&O:

Abhay wants to trade in Nifty futures. The required margin is Rs 1,00,000, but he only has Rs 20,000 in cash. He pledges Rs 2,00,000 worth of shares in Infosys and Reliance and gets the remaining amount, i.e., Rs 80,000 as margin.

2) For Intraday or Short-Term High-Volume Trading:

Raj is an intraday trader. He sees a strong setup in Tata Motors and wants to trade with higher volumes. He pledges his long-term holdings in ITC to generate margin and executes his high-volume trade without needing extra funds. 

3) To Avoid Selling Long-Term Holdings:

Meera owns HDFC Bank shares that she bought 3 years ago. She does not want to sell them due to long-term capital gains benefits and dividend income. Instead, she pledges them to generate margin for a short-term trade in Infosys. 

4) For Sudden Market Opportunities:

The stock market crashes suddenly, and high-quality stocks like JTL Industries are trading at a discount. Priya does not have cash available with her, but she pledges her existing stocks and uses the margin to buy during the dip.

Conclusion

Margin pledge and MTF pledge are powerful leverage mechanisms, but each comes with distinct implications for ownership, cost, and risk. Understanding which facility to choose will depend on your investment needs. 

If you already own socks and want to use them without selling, the margin pledge gives you flexibility. But if you are short on cash and want to buy stocks now and pay later, MTF might be your go-to option. Either way, knowing how each concept works can help you make the most of your portfolio!

FAQs

Q1. Can we use the pledged margin for delivery?

Yes! Margin pledge is a facility that allows you to use your existing securities as collateral to borrow additional funds for trading in equity delivery, intraday, futures, and options. 

Q2. Can I use pledged margin to buy shares?

Yes, you can use the pledged margin to buy shares.

Q3. What is the interest rate on a margin pledge?

No interest is charged for using pledged margin

Q4. Can I buy futures using pledged margin?

Yes, the pledged margin can be used to trade future contracts.

Q5. Can we use pledged margin for option buying?

Yes, you can use pledged margin for option buying, but at least 50% of the premium must be paid in cash or cash equivalents.