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Zerodha Founder and CEO Nithin Kamath on Wednesday said the sharp boom-and-bust witnessed in South Korea's stock market has highlighted the risks associated with rising margin funding in India, warning that a steep market correction could trigger widespread selling in small- and mid-cap stocks.
In a post on X, Kamath described the developments in the Korean market as his "biggest nightmare" as a broker, saying the rapid growth in Margin Trading Facility (MTF) books across the industry has significantly increased market risks. "My biggest nightmare as a broker is what's happening in the Korean markets right now. The source of my nightmare is the way our MTF book has been growing along with the industry as a whole," Kamath said. He added that Zerodha's Rs 9,000-crore MTF book is "by far the biggest risk we have taken since we started in 2010." According to Kamath, the key concern lies in the composition of the firm's MTF portfolio, with nearly half the exposure concentrated in non-F&O stocks that can hit lower circuits for multiple sessions, making exits difficult during sharp market declines. Explaining the risks, Kamath said a strong market rally often leads to an increase in leverage as the value of pledged collateral rises, allowing investors to borrow more. However, when markets reverse, falling collateral values trigger margin calls, resulting in forced selling that can accelerate market declines. "When the markets fall, things get really ugly. The first leg of selling tends to be small, but as collateral and margin values drop, margin calls increase, leading to forced selling... this downside move becomes a self-reinforcing loop until things stabilize," he said. The comments come after South Korea's benchmark KOSPI index has witnessed extreme volatility in recent months. After surging more than 60 per cent between April and June, the index has corrected sharply, falling over 35 per cent in the past month amid heavy selling. The benchmark is currently trading at around 5,663, with the sharp reversal drawing attention to the risks associated with leverage-driven rallies and forced deleveraging during market downturns. Kamath noted that India's MTF market has expanded rapidly only over the past three to four years and has not yet experienced a sharp correction comparable to the one seen in South Korea since the COVID-19 pandemic. He cautioned that although MTF remains a relatively small proportion of India's overall market capitalisation, a steep decline in domestic equities could result in severe selling pressure across many small- and mid-cap stocks, as brokers currently offer MTF on nearly 1,500 stocks. Kamath, however, credited market regulator SEBI for preventing excessive leverage in India. "Luckily, thanks to SEBI, we've avoided the worst excesses that typically arise from unchecked leverage," he said. (ANI)
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