Derivatives criteria rejig to guard retail investors likely this week

Mumbai: India's capital markets regulator could issue a circular as early as this week tweaking the eligibility criteria for cash stocks to be listed on the derivatives (futures and options) segment, said a person aware of the matter.

The rationale is to align the eligibility criteria with parameters like size and liquidity of the cash market to protect investor interest through effective price discovery, the person cited above said on condition of anonymity, adding that the revision could result in the number of stock derivatives rising to around 190 from the current 182.

“Derivatives stocks having low cash market liquidity can be cornered on the F&O segment by a few constituents who can influence the underlying share's spot price to the detriment of the retail investor,” the person explained. “Sebi's move will safeguard investor interest while leading to orderly development of the market at the same time.”

Also read | Mint Explainer: Why Sebi wants retail investors to stay away from derivatives

This will be the first time since 2018 that the framework would be changed, according to a consultation paper on the subject issued on 8 June by Securities and Exchange Board of India (Sebi). Sebi had sought public comments on the review until 19 June.

“The matter was discussed by the SMAC on Thursday (20 June) after public comments on the same were received a day earlier,” the person added. SMAC refers to the secondary market advisory committee, which reviews developments in the secondary or cash market.

The SMAC is chaired by G. Mahalingam , a former whole-time member of Sebi. Its members include chiefs of stocks exchanges, depositors, exchange forums and senior broking officials.

Queries emailed to a Sebi spokesperson remained unanswered until press time.

What are the changes being proposed?

The proposed changes include increasing the market-wide position limit—maximum number of outstanding futures and options contracts for a particular underlying stock—on a rolling basis from ₹500 crore to ₹1,250-1,750 crore; raising the average daily delivery value in the previous six months from ₹10 crore to ₹30-40 crore; and increasing a stock's median quarter sigma order size from ₹25 lakh to ₹75-100 lakh. (The higher the quarter sigma order size, the more difficult it is to manipulate a stock.)

Also read | Sebi plans tweaks to address derivative trading risks: Report

The criterion relating to picking the stocks from among the top 500 in terms of average daily market capitalisation and average daily traded value in the preceding six months remains unchanged.

"Tweaking the eligibility criteria bodes well for investor interest," said Siddarth Bhamre, head of institutional research at Asit C. Mehta.