F&O lot sizes of many to increase as SEBI hikes contract size to ₹5 lakh

In a move that could restrict retail investor participation in the derivatives segment, market regulator SEBI on Monday increased the minimum contract size in the equity derivatives segment to ₹5 lakh. At present, the minimum contract size in the equity derivatives segment is ₹2 lakh.

The value of a contract is calculated by multiplying the futures price with the number of shares that should amount to ₹5 lakh. For example, the IndusInd Bank whose current market lot is 250 may go up to 550, according to the new norm.

The lot size for derivatives contracts in the equity derivatives segment should be fixed in such a manner that the contract value of the derivative on the day of review is within ₹5 lakh and ₹10 lakh, SEBI said.

For stock derivatives, the lot size (in units of the underlying) should be fixed as a multiple of 25, provided the lot size is not less than 50. “However, if the contract value of the stock derivative at the minimum lot size of 50 is greater than ₹10 lakh, then the lot size shall be fixed as a multiple of five, provided the lot size is not less than 10,” it added.

Similarly, for index derivatives, the lot size (in units of the underlying) should be fixed as a multiple of five with minimum lot size of 10.

The changes will be effective from the next trading day after expiry of October 2015 contracts.

According to analysts, the move could increase the lot sizes of many stocks and index futures and that will alienate retail investors from the vibrant segment.

Currently, both investors and foreign institutional investors control 40 per cent of open interest each in the derivative segment.

According to a Mumbai-based analyst, the move will kill liquidity in the derivative segment, as retail investors contribute sizeable volume. “The current system is working well and the exchanges are ensuring enough margins in place to meet huge volatility,” he added.

Instead of raising the contract size, SEBI could have considered making delivery compulsory in the case of stock futures and options, another market expert said on condition of anonymity. Currently, all derivative contracts are squared-off by cash, and stock delivery will definitely help retail investors to a great extent, he added.

However, Ramesh Chordia, independent analyst, welcomes the move for two major reasons:

One, at present retail investors enter the F&O segment without ascertaining their risk capabilities and invariably lose money on most occasions.

And two, this will drive up volumes in the cash segment, as most retail investors who moved out of this segment to derivatives to make a quick buck, will now come back as day traders, he said.

To boost trading volumes in the cash segment, SEBI and the government should give tax concession, he added. The stock exchanges should ensure that the lot size is same for an underlying traded across exchanges, SEBI said.

For the first time since the launch of derivatives in June 2000, SEBI has proposed the review of the minimum contract size.