India has been witnessing a significant surge in the number of new demat accounts over the past few years. Investors opened more than 32 million demat accounts in the first eight months of this year alone, raising the total number of accounts in the nation to over 17 crore. This number surpasses the populations of several countries, including Russia, Mexico, and Japan. The excitement surrounding Initial Public Offerings (IPOs) and the potential for profitable returns largely drive the rise in demat accounts.
The Allure of IPOs and Trading
Over 50 companies launched their IPOs recently. They collectively raised an impressive ₹53,419 crore by the end of August. This influx of new companies entering the market captured the attention of many aspiring investors. It encouraged them to open demat accounts and explore opportunities in the stock market. However, IPOs are not the only factor driving this growth. Many new demat account holders are also eager to dive into trading. This includes experimenting with derivatives, such as Futures and Options (F&O), which offer the potential for substantial profits.
But getting started in trading has its own set of hazards. Many new traders find themselves ill-prepared for the volatile nature of the stock market. Unfortunately, a significant percentage of them end up incurring losses.
The Rise of Retail Losses
Recently, the Securities and Exchange Board of India (SEBI) released a concerning report regarding retail traders’ profit and loss in the financial year 2024 (FY24). The numbers revealed some startling statistics. Roughly 91.1% of individual traders in the F&O segment, or roughly 73 lakhs, lost money. On average, these traders faced net losses of nearly ₹1.2 lakh each.
Furthermore, the total losses incurred by individual traders from FY22 to FY24 surpassed a staggering ₹1.81 lakh crore. This figure accounts for all transaction costs and highlights the severity of the situation. In FY24 alone, traders lost about ₹75,000 crores. Given these alarming statistics, it was clear that SEBI needed to take action to protect retail investors and mitigate further losses.
SEBI’s New Guidelines
In response to the rising number of retail trading losses, SEBI introduced six new regulations aimed at reducing the risks associated with trading, particularly in the F&O segment. Here are the key changes:
Reduction in Weekly Index Expiries: Starting November 20, exchanges will be allowed to offer derivatives contracts for only one of their benchmark indices with weekly expiries. This change aims to lower trading volumes and reduce speculation, ultimately stabilizing the market.
Increase in Lot Size: SEBI is raising the F&O lot size from ₹5 lakhs to ₹10 lakhs, and later to between ₹15 and ₹20 lakhs, beginning on November 20. This measure aims to deter smaller traders with limited capital from entering the F&O market, where risks are higher.
Increase in Margin Requirements: An additional Extreme Loss Margin (ELM) of 2% will be applied to all short positions that are open on the date of expiry. The purpose of this legislation is to shield traders from sudden market swings that could result in large losses.
Upfront Premium Collection: Brokers will be required to collect the option premium upfront when placing an order starting February 1, 2025. This change aims to prevent individuals from trading on leverage, which can amplify risks.
Removal of Spread Benefit: Previously, traders could benefit from margins when hedging option positions by buying and selling option contracts with different expiries. The new guidelines eliminate this margin benefit, which is expected to decrease the number of trades.
Periodic Monitoring of Margins: In the past, position margin limits were checked only at the end of the day. Under the new regulations, brokerages will monitor traders’ open positions multiple times throughout the day. This change ensures that traders stay within their allowed limits and helps to prevent excessive risk-taking.
Impact of the New Guidelines
Following the announcement of these guidelines, investor sentiment toward Indian exchanges improved. The share price of the Bombay Stock Exchange (BSE) rose by 2.45% on the National Stock Exchange (NSE). Investors perceived the changes as less stringent than anticipated, which contributed to this positive response.
However, the implications for brokerage firms are mixed. Some industry experts predict a potential impact of up to 60% on volumes for F&O trades and a 30% decrease in overall orders on platforms like Zerodha. Since brokerage companies rely on trading volumes for revenue, a decrease in activity could affect their financial performance. The stock prices of brokerage firms reflected this, as companies like IIFL Securities and 5Paisa experienced declines of 2.5% and 2.6%, respectively.
While the new SEBI guidelines may have a mixed reception in the markets, their primary aim is to protect retail traders in India. By implementing higher barriers and stricter monitoring, SEBI seeks to reduce speculation, minimize volatility, and encourage more informed trading practices. We will still need to see how effective these measures are in curbing retail losses and enhancing trading stability.
