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SEBI plans to change the selection criteria for entry and exit of stocks in the derivatives market to reflect current market conditions.
About two dozen of the 182 companies that are part of the F&O segment could see an exit if the new rules are implemented, according to Nuvama Alternative & Quantitative Research. These include Abbott India, Bata, Berger Paints, Gujarat Gas, Ipca Labs, Torrent Pharma and United Breweries.
Derivatives contracts can be traded only if the underlying stocks meet certain criteria. Such criteria were last reviewed in May 2018. Since then, index values of Sensex and Nifty have risen 110 per cent whereas the daily average turnover in the cash market has surged 253 per cent.
Higher risks
The regulator’s June 8 consultation paper flagged higher risks of market manipulation and volatility without sufficient depth in the underlying cash market and appropriate position limits around leveraged derivatives.
“There is a need to ensure that only high-quality stocks in terms of size, liquidity, and market depth are available in the derivatives segment. Stocks that have low derivative turnover, low open interest, and narrower participation in the derivatives segment are vulnerable to manipulation and expose investors to heightened risk,” it said.
One of the eligibility criteria for inclusion and exclusion is the stock’s Median Quarter-Sigma Order Size over the last six months, on a rolling basis. This figure may be raised 3-4 times from a minimum of ₹25 lakh at present.
The minimum market wide position limit in the stock on a rolling basis may be upped to ₹1,250-1,750 crore (from ₹500 crore now). The stock’s minimum rolling average daily delivery value in the cash market in the previous six months could be ₹30-40 crore (from ₹10 crore).
3-month period
If a stock fails to meet these criteria for three months consecutively, it will exit the F&O segment and no new contract will be issued on the stock.
The regulator proposes to extend its Product Success Framework (PSF), applicable to index derivatives, to stock derivatives as well. The said framework mandates that derivatives on an index should have sufficient turnover, open interest, and widespread participation. No fresh contracts will be issued on any index failing to meet any of these criteria. PSF will apply to stocks that completed six months in the stock derivatives segment.
About 75 companies such as Zomato, Jio Financial, Tata Elxsi, Delhivery, Adani Green, Adani Total Gas, Adani Transmission, JSW Energy, Angel One, NBCC, SJVN, Oil India and BSE could potentially be included.
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