Security groups are not working even though all iptables rules are created on compute node?

Issue

• We have attached a security group to an instance. While exploring "iptables -nL" on compute node, we can see all rules required for security group to work are created without any issues. But, no rules are respected and all traffic to vm are allowed.
  Eg, We have allowed only http and ssh to the instance. We can see that all other ports are reachable, not just 80 and 22.

• We added iptables LOG rules to FORWARD chain and can see that packets to instances are never traversed through the iptables chain. This is why iptables rules are not effective. How can I resolve this?