RBI's New Funding Rules Shake Markets: BSE, Angel One Stocks Drop 10%

Introduction to the New Regulatory Shift

The Indian stock market witnessed significant turmoil as shares of capital market intermediaries, including BSE Ltd. and Angel One, plummeted by up to 10% on Monday. The sharp sell-off was a direct reaction to the Reserve Bank of India (RBI) announcing stricter prudential norms for banks' exposure to the capital market. These new regulations, aimed at curbing speculative trading, prohibit banks from financing proprietary trading activities by brokerage firms and mandate stringent collateral requirements, sending ripples of concern across the industry.

Decoding the RBI's New Directives

On February 13, 2026, the RBI issued revised guidelines that fundamentally alter the funding landscape for stockbrokers and other capital market intermediaries. Set to take effect from April 1, 2026, these rules introduce several key changes. Most notably, banks are now barred from extending credit facilities to brokers for the purpose of proprietary trading, which is when firms trade with their own capital. Furthermore, all credit facilities provided to these intermediaries must be fully secured by collateral. The central bank has also specified the quality of this collateral. For margin trading facilities (MTF), at least 50% of the required collateral must be in the form of cash. For other guarantees, equity shares used as collateral will be subject to a 40% haircut, effectively reducing their value for lending purposes.

Immediate Market Reaction

The market's response to the announcement was swift and severe. Investors, anticipating a significant impact on the profitability of brokerage firms and exchanges, initiated a widespread sell-off. The new rules are expected to squeeze profit margins and potentially reduce overall trading volumes, which are a key source of revenue for these companies.

The Nifty Capital Markets Index reflected the sector-wide panic, falling by as much as 4.3% during intraday trading. This sharp decline occurred even as the benchmark Nifty50 index remained relatively stable, highlighting the targeted nature of the investor concern.

The Significance of Proprietary Trading

The RBI's focus on proprietary trading stems from its significant contribution to market volumes, particularly in the derivatives segment. According to recent data, proprietary trading firms accounted for over 50% of the total equity options turnover on the National Stock Exchange (NSE). Their share in the cash market was also substantial, at approximately 30%, a 21-year high. By tightening the funding for these activities, regulators aim to reduce excessive speculation and mitigate systemic risks. This move, combined with the recent budget announcement of an increased Securities Transaction Tax (STT), has created a challenging environment for proprietary traders.

Impact on Brokerage Operations and Profitability

The new framework forces brokerage firms to rethink their funding strategies. With the channel of bank funding for proprietary activities now closed, brokers must seek more expensive alternatives such as issuing non-convertible debentures (NCDs) or commercial papers (CPs). This shift is expected to increase their cost of capital and compress margins. Analyst firm Jefferies estimated that the new regulations could lead to a roughly 10% reduction in earnings for BSE, as a significant portion of its options turnover is linked to proprietary trading. The report suggested that BSE might try to offset this impact by increasing its transaction charges.

Specific Challenges for Key Players

Retail-focused brokers with large margin trading books are particularly affected. For instance, Angel One, with an MTF book of ₹6,100 crore, will need to reassess its funding sources, as about half of its borrowings previously came from banks. Similarly, Groww, which saw its MTF book expand fourfold to ₹2,300 crore in the last quarter, will likely need to tap debt markets to sustain its growth. The mandate for continuous collateral monitoring and explicit margin call provisions adds another layer of operational complexity and cost for these firms.

Analyst Perspectives on the New Norms

Market analysts have provided a mixed view of the regulations. JM Financial noted that the rules appear to favor banks by allowing them to participate more actively in structured acquisition financing while containing systemic risk. However, for brokers, the 100% collateral requirement and steep haircuts on share collateral will likely reduce their access to bank funding and increase trading costs. The consensus is that while the measures enhance financial stability, they create immediate operational and financial headwinds for the brokerage industry.

Conclusion and Forward Outlook

The RBI's new funding norms represent a significant regulatory intervention designed to de-risk the capital markets by targeting speculative leverage. While the long-term goal is to foster a more stable financial ecosystem, the short-term consequences include a significant disruption for brokerage firms, exchanges, and proprietary traders. With the April 1, 2026 deadline looming, these companies have a narrow window to restructure their funding arrangements and adapt to a new, more stringent regulatory reality. The coming months will reveal the full extent of this policy's impact on market liquidity, trading volumes, and the profitability of the capital market sector.