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SEBI Watch:Revisit minimum contract size norm for equity derivatives

Informist, Tuesday, Apr 6, 2021

 

By Rajesh Gajra

 

The National Stock Exchange of India has cut the minimum lot size for trading in Nifty 50 derivatives contracts to 50 from 75, as the sharp rise of the benchmark index over the last one year led to the contract value crossing the regulatory ceiling threshold of 1 mln rupees.

 

The Securities and Exchange Board of India prescribes a minimum value of 500,000 rupees for any contract in the equity derivatives segment, and permits a change in the trading lot size when the value of the contract crosses 1 mln rupees or falls below 500,000 rupees.

 

The idea of a minimum contract value for derivatives contract is over 20 years old and needs to be revisited.

 

In 1998, SEBI decided to impose a 100,000-rupee minimum contract value condition for all derivative contracts. The finance ministry, however, doubled it to 200,000 rupees.

 

Trading in equity derivatives, through index futures, was just getting under way at that time, and it was believed that limits such as these were essential to protect retail participants due to their lack of awareness about the risks in derivatives trading.

 

In 2015, SEBI tweaked the rule and increased the minimum contract value to 500,000 rupees. There was no reason given behind the decision.

 

But now the capital market regulator must revisit the underlying assumptions behind having the minimum size requirement. It could invite comments from the market players and the public investors through consultation papers.

 

In September 2002, the SEBI advisory committee on derivatives in its report on development and regulation of derivative markets had pitched for the removal of the minimum contract size condition.

 

The committee had rightly argued that derivative products provided investors with a cost-effective tool for hedging the market risk on their portfolio and that the minimum contract size did not match with the size of the portfolio of every investor.

 

It also reasoned that "a large cross-section of persons participating in the market would increase the diversity of the views expressed, which could lead to fair price discovery." The minimum contract size stipulation was causing the views of many investors to be excluded from the price discovery mechanism.

 

Market participants now have a fair understanding of the risk-reward dynamics involved in derivatives trading.

 

It may perhaps be time for SEBI to reconsider the recommendations made by the derivatives advisory panel in 2002. How about seeking fresh views on the subject?

 

LATEST ANNOUNCEMENTS

* Promoters must publicly disclose intent to delist co, says SEBI

* SEBI asks cos to upload analyst meet transcripts in 5 working days

* SEBI board approves substantial dilutions to start-up listing norms

* SEBI clarifies norms on transfer of shareholding to relatives

 

ORDERS, ADJUDICATION PROCEEDINGS

* SEBI orders attachment of bank, demat accounts of Alchemist Holdings, 3 others (PTI)

* SEBI orders disgorgement of 603 mln rupees in Zenith Birla GDR issue 

* SEBI orders to attach Rana Kapoor's bank, mutual fund accounts 
* SEBI bars directors of 2 Ruia Group cos for listing norm violation 

 

REGULATIONS (Announced in the past three months)

* SEBI eases norms for alternative investment funds

* SEBI issues new sustainability reporting requirements for listed cos

* SEBI mandates dividend payout policy for top 1,000 cos by market cap

* SEBI cuts board, shareholder meet gap for promoter reclassification

 

DATA FROM SEBI

 DateUnit LatestPrevious
FII/FPI net equity investment

Mar 31 & Apr 1

US$ mln(-)230.42(-)64.41
FII/FPI net debt investmentMar 31 & Apr 1US$ mln224.40(-)11.47
DIIs net equity investment#Mar 31bln rupees1.286.58
DIIs net debt investment#Mar 31bln rupees4.382.34

 

 

IPO/FPO/NFO

* NHAI files papers with SEBI for InvIT; plans to raise 51 bln rupees (PTI) 

* Tatva Chintan Pharma Chem files draft papers with SEBI

* Jana Small Finance Bank files draft prospectus with SEBI

* Seven Islands gets SEBI's nod for 6-bln-rupee IPO

 

SEBI IN NEWS

* SEBI doubles number of listed cos required to have risk mgt committee

* IDBI Bk sets up 2.5-mln-rupee recovery expense fund as per SEBI norms 

* SEBI tells bourses, depositories to act faster in case of disruptions 

* Network18 Media settles rights issue case with SEBI for 16 mln rupees 

 

Sources – Television, Print, or Web Editions of: PTI–Press Trust of India, BS–Business Standard, ET–The Economic Times, Moneycontrol, CNBC TV-18, Mint, BL–The Hindu Business Line, TH–The Hindu, RTR—Reuters, BT–Business Today, IANS–Indo-Asian News Service, IE— The Indian Express, ToI–The Times of India, BB-Bloomberg Quint

 

Internet links: http://www.sebi.gov.in

 

End

 

# — Data not available for Apr 1

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Compiled by Pooja Sawant

Edited by Akul Nishant Akhoury

 

Cogencis news is now Informist. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

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