New-age tech stocks such as Zomato, Paytm, PB Fintech, Nykaa, and Delhivery might soon enter the futures and options (F&O) trading segment. This potential shift comes in light of the Securities and Exchange Board of India’s (SEBI) newly proposed eligibility criteria for the derivatives market, according to a research note by Nuvama Institutional Equities.
SEBI’s Proposed Changes
On June 8, SEBI released a consultation paper outlining the need to revise the eligibility criteria for stock derivatives to reflect current market dynamics. The regulator highlighted that derivative markets play a crucial role in enhancing price discovery and market liquidity. However, it also noted that without sufficient depth in the underlying cash market and appropriate position limits on leveraged derivatives, risks such as market manipulation, increased volatility, and compromised investor protection could arise.
“To support the development of the securities market while mitigating these concerns, SEBI established a framework in 2018 for selecting stocks eligible for derivatives trading. Given the evolving market context, we now propose to update this framework and its criteria accordingly,” SEBI stated.
Derivatives Market Overview
Derivatives are financial contracts whose value is derived from underlying assets like stocks and commodities. These contracts, including forward contracts, swap contracts, and futures and options, are traded both over the counter and on exchanges such as BSE and NSE in India.
Potential Changes in F&O Segment
Based on SEBI’s consultation paper, Nuvama Institutional Equities identified several stocks that might be added to the F&O segment if the proposed criteria are implemented. These include major tech stocks like Jio Financial Services, Infibeam Avenues, LIC, Olectra Greentech, Adani Green, Adani Total Gas, Tata Elxsi, and Piramal Pharma.
Conversely, some stocks might face removal from F&O trading. Nuvama highlighted stocks such as Abbott India, J K Cements, Bata India, and Sun TV Network as potentially at risk.
Key Proposed Eligibility Criteria
SEBI’s proposed eligibility criteria for the entry and exit of stocks in the derivatives segment include:
- Median Quarter Sigma Order Size: Increasing the required size from INR 25 Lakh to INR 75 Lakh-INR 1 Cr.
- Market-Wide Position Limit: Raising the limit on a rolling basis from INR 500 Cr to INR 1,250 Cr-INR 1,750 Cr.
- Average Daily Delivery Value: Increasing from INR 10 Cr to INR 30 Cr-INR 40 Cr.
SEBI also proposed a product success framework (PSF) for stock derivatives. This framework, currently applied only to index derivatives, mandates sufficient turnover, open interest, and widespread participation. For single stock derivatives, similar exit criteria based on performance metrics are suggested.
Public Consultation
SEBI has invited public comments on these proposals, with the submission deadline set for June 19, 2024. This feedback will be crucial in finalizing the updated eligibility framework for stock derivatives.
