SEBI Considers Tighter Checks for Stocks in F&O Entry

The Securities and Exchange Board of India (SEBI) is planning to tighten the guidelines for futures and options (F&O) trading. The revised norms could include increasing the margin requirements, tightening the eligibility criteria, and enhancing net worth disclosure requirements for investors, according to sources close to the development. This move is in response to the continuous increase in retail participation in the derivatives market.

Last week, the market regulator sent a letter to the Association of Mutual Funds in India (AMFI), requesting feedback from the industry body on the current guidelines for derivatives trading and suggestions on how they can be tightened. 

In addition, SEBI has formed a committee that includes brokerage firms and asset management companies to provide their recommendations. "The recently formed committee will consider all the recommendations made by various bodies and industry experts," said the head of a brokerage firm.

A few months back, SEBI’s chairperson Madhabi Puri Buch had expressed her anguish with retail investors participating in the derivatives market. “I am always a little confused and surprised as to why people continue to do that (betting in F&O) knowing that the odds are not in their favour at all,” she had said. 

Her comments came in the context of a SEBI report indicating that 89% of retail F&O investors end up losing money. Additionally, the participation of young individual traders (aged 20-30) in equity F&O, particularly in index options and stock options, has increased to over 35% each, from nearly 11% in FY19. Over the past three years, the number of individual traders in index options and stock options has increased by 8 times and 5 times, respectively. 

Since FY22, the daily average turnover in the NSE F&O segment has grown by over 100% each year, primarily due to the increased participation of retail investors.

On Friday, National Stock Exchange (NSE) CEO Ashishkumar Chauhan cautioned retail investors against trading in derivatives. He emphasized that trading in F&O should be limited to informed investors who can manage risk and understand the market.

According to the head of a brokerage house, the market regulator should introduce tighter measures in the segment, as is the case in foreign jurisdictions. “In speculation, most are likely to lose money so we have to discourage this type of culture, because ultimately they’ll blame the broker, the regulator, and the market,” added the broker.