Sebi's Skewed Policy On F&O Worries Stock Markets

Concern in India's stock markets is growing that a skewed policy of not bringing in new stocks in the equity derivatives segment is pushing traders to speculate more on the index derivatives. Market regulator SEBI has not included any new stock in the equity derivatives segment since January 2022. India's equity derivatives segment consists of 185 stocks despite there being thousands of stocks that are listed on the two exchanges the BSE and the National Stock Exchange (NSE). This, despite the fact that dozens of stocks fit SEBI's set criteria for their inclusion in the derivatives segment. 

The move by SEBI to keep a lower number of stocks in the derivatives segment has pushed derivatives trading volumes towards the index segment in a big way, experts said. If SEBI believes that adding stocks to the derivatives segment will force retail participants to speculate more, then it is a skewed logic, experts told BW. Those retail investors who want to speculate are unstoppable since more than 95 percent of India's equity derivatives volumes is concentrated in the index derivatives segment, data shows.

"There is no justifiable ground to not add stocks to the derivatives segment even if they are eligible as per the set criteria. A criteria was created to ensure that there was no disparity in rules regarding the entry and exit of stocks in the derivatives segment. But it is surprising to see how that criteria has been dumped when it comes to inclusion of stocks," said Rajesh Baheti, MD, Crosseas Capital. 

Few market participants and brokers have even complained to SEBI with regard to such disparity in rules on inclusion of stocks in derivatives segment, sources said.

Misplaced emphasis on introducing new index derivatives contracts

Market participants are worried that SEBI isn't providing explanations for excluding stocks that meet the criteria Despite efforts to highlight this issue, discussions about adding individual stocks to derivatives aren't happening in SEBI's secondary market advisory committee (SMAC), sources said. Exchange recommendations too have been rejected in this regard, according to the sources.

But there's a noticeable and misplaced emphasis on introducing new index contracts, say brokers. Since January, BSE has been allowed to introduce new index derivatives contracts that have expiry on various days during the week.

Sebi has powers to set and amend the criteria for including stocks in futures and options (F&O), which were last reviewed in 2018.

Criteria for inclusion of stocks in derivatives

The selection of stocks should be from the list of the top 500 stocks based on the averages of daily market capitalization and daily traded value in the past six months on a rolling basis.

The Market-wide position limit (MWPL) in the security should be Rs. 500 crores or more.

The median quarter-sigma order size for the previous six months is over Rs. 25 lakhs.

The average daily delivery value in the cash market should be more than Rs. 10 crores in the past six months on a rolling basis.

(Each of the criteria above is to be fulfilled for six months continuously).

However, for the last couple of years (particularly after 2019), SEBI has shown less transparency in deciding stocks that should be allowed in F&O, brokers said. Market participants and brokers have often gossiped about the play of vested interests in inclusion and exclusion of stocks in derivatives.

In large stock markets elsewhere, most stocks are under the F&O segment, which allows market participants to hedge their positions. For instance, nearly 6000 have option contracts linked to them.

Brokers say stocks in F&O bring their own benefits for the markets including increased liquidity, yield creation opportunity in stocks that are stagnant, protection against specific stocks in portfolio rather than having to take a bet on the entire index moves.