SEBI Introduces New Measures to Reinforce Equity Markets

The Securities and Exchange Board of India (SEBI) has announced a series of new measures for the futures and options (F&O) segment. This decision is a response to a concerning trend where nine out of ten participants have consistently lost money over the past three years. The market regulator has increased the minimum contract size in index derivatives from the current Rs 5 lakh to Rs 15 lakh. This measure is expected to limit participation by smaller investors or force them to trade with more capital, potentially reducing their exposure to high-risk trades.

In addition to this, SEBI has reduced the weekly index expiry count to one per exchange. This means that exchanges can only offer one expiry in a week on one benchmark index. This move is expected to limit trading strategies that rely on frequent expirations, thereby reducing speculative activities, especially around expiry days.

SEBI’s circular stated, In order to specifically address this issue of excessive trading in index derivatives on expiry day, it has been decided to rationalise index derivatives products offered by exchanges which expire on a weekly basis. Henceforth, each exchange may provide derivatives contracts for only one of its benchmark index with weekly expiry.

The regulator has taken these steps due to the heavy losses incurred by retail investors in the F&O segment. A recent study released by SEBI revealed that in the last three years, a combined loss of Rs 1.81 lakh crore has been incurred by 1.10 crore traders. Out of these, only 7 per cent of traders have been successful in making a profit.

The new measures will be effective for all new index derivatives contracts introduced after November 20, 2024. After the new SEBI circular, the size of derivatives contracts in benchmark indices like Nifty and Sensex will increase from Rs 5 lakh-Rs 10 lakh to Rs 15 lakh-Rs 20 lakh.

The derivatives market in India has seen significant growth in recent years. In July, SEBI’s paper stated that India’s derivatives market has surpassed the cash market. Currently, India accounts for 30 to 50 per cent of the total global derivatives trading. The cash market turnover in India has doubled from FY 20 to FY 24, while the turnover of index options has increased 12 times to Rs 138 lakh crore in FY 24, which was Rs 11 lakh crore in FY 20.

The new measures are expected to impact retail investors in the F&O segment by discouraging excessive intraday leverage, which might lead to more cautious trading by retail investors. The measures aim to promote a more stable trading environment, which could benefit retail investors in the long run by reducing the risk of large, sudden losses.

However, some retail investors might find the new rules restrictive and may need to adapt their trading strategies to comply with the new regulations. The phased rollout of these measures is designed to prevent sudden shocks to the market, allowing participants to adapt to the changes over time. This gradual tightening could lead to a healthier market environment overall.

SEBI’s main concern that led to implementing measures specifically related to the expiry day of F&O contracts is the excessive trading and speculative activities that occur on these days, which can lead to significant market volatility and, consequently, heavy losses for retail investors. By rationalising index derivatives products with weekly expiries and implementing measures to address basis risk, SEBI aims to reduce these risks and promote a more stable and fair trading environment.