Sebi approves stricter norms for inclusion of individual stocks for derivative trading
Mumbai, Jun 28, 2024
Synopsis
The criteria for exit would apply to only those stocks which have completed at least six months from the month of entry into the derivative segment. while for existing stocks in the derivatives segment, the exit criteria on the basis of performance would be applicable three months after the date of issuance of circular, Sebi said.
India tightened rules for individual stock inclusion in the derivatives segment amid an exponential volume surge and concerns about speculation, and eased norms for those seeking to delist by approving a fixed price offer as an alternative mechanism to a book-built price discovery.
The Securities and Exchange Board of India (Sebi) has also set up a working group under the chairmanship of former executive director of the central bank, G Padmanabhan, to look into future and options trading to enhance investor protection and improve risk metrics to develop and regulate the market, said its chief Madhabi Puri Buch after a board meeting Thursday.
“The trend we are seeing in trades like concentrated weekly auctions, only on expiry day, in the last one hour, are just speculative bets,” Buch said. “These have no nature of hedging; these have no other nature other than speculation. The question is what needs to be done further from an investor protection perspective.”
She said there were concerns about the flow of household savings to instruments that are essentially speculative in nature.
“From a larger macroeconomic perspective, there is a large amount of money that is going from household savings into what is essentially not productive economic activity. This is speculative activity,” she said. “This is not going into any capital formation in the economy.”
To be sure, the new rules pertain to individual stocks - and not indices that dominate F&O trading currently.
Sebi's decision to tighten rules for inclusion of individual stocks in the F&O segment will lead to the addition and deletion of about two dozen stocks.
Long Overdue
“In order to ensure that there is a healthy linkage between the cash market and the F&O market, many years ago we had brought in a regulation that there will be physical delivery of open positions on expiry. That was the first step we had taken in that direction,” Buch said. “The second step is to say which stocks will be committed on the F&O basis, the criteria of how their shares trade in the cash segment… we need to adjust those parameters because they were set in 2018.”
She added that the criteria needed to be revisited given the explosive growth in Indian risk assets.
“So, in line with the way market value and volume have grown, we have changed those parameters of eligibility to enter the F&O stocks,” she added.
The criteria for exit would apply to only those stocks that have completed at least six months from the month of entry into the derivative segment. while for existing stocks in the derivatives segment, the exit criteria on the basis of performance would be applicable three months after the date of issuance of the relevant circular, Sebi said.
Limited Volume Impact
“The new regulations on barriers for single stock entry may not have a significant price impact on the stocks moving out of the list as we have seen over the years. However, traders prefer stocks that are also traded in the derivatives segment to hedge their cash positions,” said Chandan Taparia, head of technical and derivatives research at Motilal Oswal Financial Services.“Similarly, funds that hold the stocks which may move out may not prefer to trade them anymore, which may result in falling liquidity for these stocks.”
Market participants expect stocks moving into the F&O segment to have more liquidity, although the impact may be limited as nearly the entire derivatives trade is centred around an index.
The regulator has also introduced a product success framework in single stock futures and options, to ensure that the liquidity and participation witnessed in the derivatives markets are supportive of market development and investor protection.
“The amount of money you need to manipulate an illiquid contract is very small. Therefore, it was imperative that the same protection that we have given on the indices side be also given to stock-specific F&O,” Buch said.
Delisting Processes
Sebi said it was introducing a fixed price process as an alternative to reverse book building process for delisting of companies. The fixed price offered must be at least at a 15% premium to the floor price – and the criterion of 90% public float offer acceptance remains.
The Sebi chairperson said as Indian markets mature, it is important to allow companies to go private if they wish to.
“This is not Hotel California, where you can check in any time you like but you can never leave,” she said.
The Sebi board also approved norms to regulate financial influencers. It said mutual funds and brokers should stop using unregulated financial influencers for marketing and advertising campaigns.
“The persons regulated by the board and the agents of such persons shall not have any association, like, any transaction involving money or money's worth, referral of a client, interaction of information technology systems or any other association of similar nature or character, directly or indirectly with any person who directly or indirectly provides advice or recommendation,” Sebi said.
However, financial influencers engaged in investor education would be exempt from the new restrictions.
[The Economic Times]
