In its board meeting today, market regulator Sebi is likely to discuss and may even approve the new criteria for including and excluding stocks in the derivatives segment, sources told Businessworld. India is the world's largest market for equity derivatives and the inclusion and exclusion of stocks in futures and options (F&O) has attracted controversy over the years since there are instances where the same stocks were moved in and out of derivatives multiple times. Other flaws in the current F&O criteria are that dubious market operators have found it easy to manipulate stock prices in derivatives by taking the market wide position limits to a limit where the stock is put in F&O ban and no new positions can be built -- Steel Authority Of India has been the most latest victims of such market manipulation.
For operators to rig any share price, getting that stock included in the F&O segment is preferred since there is no circuit limit for stocks in this segment. Simply put, there is no bar on the rise and fall F&O stocks during the day. In comparison, stocks that are out of F&O attract stricture circuit limits and cannot rise beyond a certain threshold in a day and even if their price moves are significant then they are put under additional surveillance measures. F&O stocks face no such perils, making them relatively easy targets for manipulation. For instance SAIL, which is an F&O stock, has remained in the ban period for 90 percent of the trading days in the past few months and no new long or short positions can be built in it. This is one of the favourite tactics of operators to obstruct any stock's natural move by getting them in the ban period. Those stocks where market wide position limits in the F&O cross 90 percent are put under a ban period until the positions are unwound.
As per Sebi's own consultation paper on new criteria for derivatives, the stocks face higher risk of manipulation due to inappropriate position limits and they want to weed out stocks from F&O that have a consistent low turnover in F&O. "Without sufficient depth in the underlying cash market and appropriate position limits around leveraged derivatives, there can be higher risks of market manipulation, increased volatility, and compromised investor protection," Sebi had said in its consultation paper.
Under Sebis newly proposed criteria, stocks that are traded for 75 percent of trading days will only be included in F&O. Further, at least 15 percent of the active traders or 200 members, whichever is low, should have traded in the stock, average daily turnover should be between Rs 500 crore and Rs 1,500 crore and average premium daily turnover should be at least Rs 150 crore for the inclusion in F&O.
Sebi's new criteria suggests that any stock's median quarter-sigma order size over the past six months should be between Rs 75 and Rs 1 crore. This figure has been hiked 3-4 times from a minimum of Rs 25 lakh as per the current criteria. Also, the stock's minimum rolling average daily delivery value in the cash market in the past six months should be Rs 30-40 crore for it to be included in F&O. Currently, this is Rs 10 crore. If a stock fails to meet the criteria for three months consecutively, then such stock should exit from the derivatives segment. It means no new contract would be issued on that stock.
Sebi's new criteria once it comes into effect is likely to result into weeding out several stocks that trade in F&O currently.
