The Rs 1.5 lakh crore MTF problem: How shrinking leveraged positions are deepening India's smallcap sell-off

India’s shrinking MTF book raises concerns about forced selling in smallcaps, as falling prices, margin calls and weak liquidity amplify market volatility despite regulatory safeguards.

Nearly 46% of the MTF book is estimated to be concentrated in smallcaps, translating into roughly Rs 72,000 crore of exposure to the segment. With prices falling and liquidity thinning in several counters, the reduction in leveraged positions could add to the pressure on stocks that have already seen sharp corrections.

The Nifty Midcap 150 fell 5.26% during the week, while the Nifty Smallcap 250 declined 7.10%. The smallcap index was down about 8.5% in October, with more than 30 stocks touching their 52-week lows. The correction has brought the risks of borrowing to invest in less-liquid stocks into focus. Falling share prices erode the value of collateral backing MTF loans, potentially triggering margin calls and forced liquidations.

While some market analysts see the unwinding as a source of additional selling pressure, others argue that India's regulatory safeguards make its MTF framework less vulnerable to the feedback loops associated with leveraged products in some overseas markets.

Nearly Rs 72,000 crore of MTF exposure in smallcaps

India's MTF book has expanded sharply over the past few years, rising from around Rs 85,000 crore in September 2024 to more than Rs 1 lakh crore in August 2025. It crossed approximately Rs 1.6 lakh crore in September 2026 after briefly declining to around Rs 71,000 crore during the early-2025 market correction.

The book has since begun to contract. MTF Analytics data showed outstanding positions at Rs 1.563 lakh crore on October 15, falling to Rs 1.54 lakh crore on October 22 — a decline of around 1.46% in a week.

Of the outstanding exposure on October 22, Rs 78,089 crore was in stocks outside the futures and options (F&O) segment, Rs 71,956 crore was in F&O stocks and Rs 3,979 crore was in exchange-traded funds (ETFs), according to MTF Analytics.

Smallcaps account for an estimated 46% of the overall book, spread across more than 700 stocks, according to The Economic Times. This puts the segment's MTF exposure at roughly Rs 72,000 crore. Stocks with some of the larger positions include Nazara Technologies, TFCI and Waterways Leisure.

The expansion has been rapid. In an August 8 article in The Economic Times, Amit Majumdar, Group Chief Strategy Officer at Angel One, said the MTF book had grown nearly five-fold, from around Rs 25,000 crore in FY23 to more than Rs 1.3 lakh crore.

How falling prices can trigger forced selling

MTF allows investors to buy shares by paying a portion of the purchase price upfront and borrowing the balance from a broker. The shares serve as collateral, and the investor pays interest on the borrowed amount for as long as the position remains open.

Consider an investor who puts in Rs 1 lakh to buy shares worth Rs 5 lakh, borrowing the remaining Rs 4 lakh. A 10% rise in the share price generates a gain of Rs 50,000 before interest and other costs. A 10% decline, however, results in a loss of Rs 50,000 — half the investor's initial capital.

Borrowing costs add to the risk. At an illustrative annual interest rate of 15%, a Rs 4 lakh loan would cost Rs 60,000 over a year, assuming the principal remains unchanged.

If falling share prices reduce the value of collateral and leave an investor short of the required margin, the broker can demand additional funds or securities. If the investor fails to meet the requirement, the broker may liquidate the position to recover its loan.

When several investors face margin calls simultaneously, forced sales can push prices lower, triggering further margin calls and adding to the selling pressure.

Risks rise as leveraged positions unwind

Zerodha co-founder Nithin Kamath warned on July 29 that the rapid growth of MTF could pose a significant risk to brokers and investors during a sharp market decline, particularly in small- and midcap stocks.

"In terms of pure risk, MTF is by far the biggest risk we have taken since we started in 2010," Kamath said in a post on X.

Kamath said Zerodha's MTF book stood at around Rs 9,000 crore, with at least half its exposure in stocks outside the F&O segment.

His concern centres on the difficulty of exiting such positions during periods of market stress. While liquid largecap stocks may have a wider pool of potential buyers during a sell-off, smaller counters can quickly hit their lower price circuits, leaving investors and brokers with limited opportunities to exit.

"When the markets fall, things get really ugly," Kamath said.

As share prices decline, the value of collateral falls, forcing investors to either bring in additional funds or reduce their positions. Those unable to meet margin requirements risk having their holdings sold by brokers, potentially putting further pressure on prices.

Kamath also cited South Korea, where leverage and leveraged exchange-traded products have raised concerns about forced selling during market reversals. He said MTF had become popular in India only over the preceding three to four years, meaning many borrowers had yet to experience a severe market drawdown while holding leveraged positions.

At the same time, he credited India's regulatory framework with helping prevent the worst excesses of unchecked leverage.

"Luckily, thanks to Sebi, we've avoided the worst excesses that typically arise from unchecked leverage," he said.

Recent outperformers face additional selling pressure

Sunny Agrawal, head of the fundamental equity research team at SBICAPS Securities, said MTF unwinding was contributing to selling pressure, particularly in stocks that had outperformed over the previous three to six months.

"Yeah, I think there is definitely some selling pressure due to MTF unwinding, no doubt about that," Agrawal said.

He said several stocks had corrected sharply despite no corresponding changes in their fundamentals or technicals.

Agrawal estimated that the MTF book had peaked at around Rs 1.6 lakh crore to Rs 1.65 lakh crore before declining to approximately Rs 1.52 lakh crore.

However, he cautioned that movements in the overall book might not fully capture the extent of the unwinding, as investors could be adding positions in some stocks while exiting others. Sharp price corrections in individual stocks, he said, suggested that MTF positions had been reduced.

Agrawal also flagged the possibility of portfolio rebalancing by smallcase managers and other registered investment advisers with exposure to mid- and smallcap stocks, while clarifying that he did not have firm data to establish whether such rebalancing was taking place.

"This also creates a vicious cycle. Once stock prices start correcting, investors across the board tend to rush for the exits," he said.

Agrawal advised investors to remain selective, focusing on companies with strong financial performance and clear earnings growth visibility. He said the correction could create opportunities to accumulate such stocks selectively, including in the midcap and smallcap segments where forced liquidation may be taking place.

Regulatory safeguards offer some protection

Amit Majumdar, Group Chief Strategy Officer at Angel One, has offered a more measured assessment of the growing MTF book, arguing that its expansion reflects deeper participation in the cash market and should be viewed in the context of India's regulatory framework.

"The key differentiator between India's MTF ecosystem and other overleveraged products seen in some overseas markets is that its built-in safeguards make it structurally less vulnerable to the feedback-loop risks that have periodically surfaced in South Korea's and the US leveraged ETF markets," Majumdar wrote in his August 8 article in The Economic Times.

He distinguished India's broker-client MTF arrangements from leveraged ETFs, which must rebalance their portfolios daily to maintain a target exposure. Indian MTF positions, he said, are monitored and liquidated individually based on margin requirements, unlike centrally managed products that can generate programme-driven buying or selling during periods of market stress.

Majumdar also cited margin requirements, approved-stock eligibility norms, exchange-monitored market-wide position limits for single-stock derivatives and broker-level exposure controls as safeguards that help keep leverage collateralised and dispersed.

"The significance of India's expanding MTF book lies not in the amount of leverage it represents, but in the depth, diversification, and resilience of the market it increasingly supports," he wrote.

Foreign selling contrasts with domestic buying

The MTF unwind is unfolding alongside sustained foreign investor selling and continued domestic institutional buying.

Foreign portfolio investors (FPIs) sold a net Rs 3.08 lakh crore of Indian equities in 2026. Domestic institutional investors (DIIs), meanwhile, invested Rs 6.98 lakh crore in equities during the year, according to the ACE Equities.

Monthly systematic investment plan (SIP) contributions reached a record Rs 32,490 crore in September, according to the Association of Mutual Funds in India (AMFI). The number of SIP accounts stood at 10.06 crore, while SIP assets amounted to Rs 17.86 lakh crore.

However, the sources of capital supporting the broader market are not necessarily the same as those driving leveraged positions in smaller stocks. Domestic institutional buying and SIP inflows can coexist with selling pressure in smallcaps if investors using borrowed funds are forced to cut exposure in less-liquid counters.

The distinction is central to concerns about the current correction: even as domestic money continues to enter equities, the unwinding of leveraged retail positions can amplify price declines in segments where liquidity is limited.

A potential feedback loop for smallcaps

The sequence is straightforward. Selling pressure pushes share prices lower, reducing the value of stocks pledged as collateral against MTF loans. Investors whose margins fall short must add funds or reduce their positions. If they cannot meet the requirements, brokers may liquidate their holdings, according to the analysts.

Those sales can push prices down further, triggering additional margin calls among other leveraged investors.

The impact can be more pronounced in thinly traded smallcaps, where a limited pool of buyers may struggle to absorb a sudden increase in selling. In more liquid largecap stocks, institutional buyers may be better placed to absorb some of the supply.

Interest costs add another layer of pressure, continuing to accrue while leveraged positions remain open, even when investors are not facing an immediate margin call.

The MTF book's recent contraction follows its rapid expansion through 2025 and much of 2026. The risks of forced selling, pressure on recent outperformers and the safeguards built into India's regulatory framework underscore the competing forces at play.

The extent to which MTF unwinding contributes to the smallcap sell-off, analysts said, will depend not only on the pace of the reduction in outstanding positions, but also on where those positions are concentrated and how much liquidity remains available as investors attempt to exit.

Disclosure: This article has been written by Kumar Gaurav, who is not a Sebi-registered Research Analyst or an Investment Adviser. Gaurav and their ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective Sebi-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here