Activity in this country, home to the world’s biggest futures and options market. Has risen smartly with the National Stock Exchange of India Ltd. and BSE Ltd together accounting for nearly 80% of global F&O volumes. But some red flags have gone up among regulators. Over the risks that rapid growth in retail trading volumes in derivatives poses. In May, Nirmala Sitharaman, the Finance Minister, hinted at a growing concern. This was then mentioned by the RBI Governor and SEBI chairperson in June. Retail derivative volumes have touched a record ₹362 lakh crore, outpacing the nominal GDP of ₹295.36 lakh crore that India is likely to clock in FY24.
SEBI’s Steps to Protect Retail Investors: F&O Market
Participation by retail investors in equity derivatives went up 42.8 percent in FY24 to 95.7 lakh from 65 lakh in FY23. Contrary to this optimistic trend. A SEBI research report published in January 2023 had a shocking fact. That 89 percent of retail participants lost money in equity derivatives during FY19-FY22. Long story short, it just goes on to prove that the risk profile of individual investors remains very high. Especially when it comes to speculative trading.
In the cash segment, the investor pays in full for stocks they buy and receive delivery. In equity derivatives, however, the investor pays a premium to buy a contract. Which grants them the right to sell or buy a specified number (100). Of a particular stock at a predetermined price in the future.
For example, an investor can buy a contract to buy 100 shares of Company X at ₹150 per share in the August 2024 series for a premium of ₹200. If the share rises to ₹250, he can get ₹10,000 minus the premium paid. Correspondingly, the premium seller would lose ₹10,000 plus the ₹200 premium he gets. The above example depicts the high stake and possible profit or loss in the F&O market. Most of the time, retail investors trade near the contract expiry date. That involves them with high risk because of sudden changes in price or low liquidity. The reason for monitoring the F&O market by SEBI is to protect investors from these risks.
SEBI’s Revised Eligibility Criteria of Equity Derivatives
It increased the threshold of stocks for introducing derivatives contracts by SEBI for an active and safe derivatives and F&O market as follows— top-500 companies: The stock eligible to be included in derivatives should form part of top 500 companies by market capitalization and average daily market turnover.
- Liquidity: Firms must have sufficient liquidity, which can match the higher trading volumes. The median quarter σ order size has increased from ₹25 lakh to ₹75 lakh. And average daily value of trades in cash market from ₹10 crore to ₹35 crore.
- MWPL: It has increased the total amount that can be bet through F&O contracts from ₹500 crore to ₹1,500 crore. This will ensure that only stocks with genuine market demand can trade in derivatives and avoid excessive speculation and preserve market integrity.
The prerequisite is that the stock should have hit these levels anytime during the last six months. These requirements ensure that investors only speculate on established, liquid stocks, cutting down the possible gambles on illiquid companies.
Impact of New Regulations
After some Research, Jio Financial and Zomato are the two stocks that would meet the revised criteria. If the F&O market adds these stocks – Adani Ports, Housing Development Finance Corporation, HDFC Bank, and Tech Mahindra – to the Nifty 50 index later this year, they may find their way into the index. If the F&O market excludes Balrampur Chini, Can Fin Homes, GNFC, and Bata India, then these companies may be taken out of the Nifty 50 index.
The revised criteria shall be applicable three months from the date of issuance of circular by SEBI. A stock can removed from the F&O market only six months after its launch date.
