Measures announced by Sebi should limit individual trading in F&O segment

For some time now, there has been concern about the surge in trading in the Futures and Options segment. In recent years, trading volumes in the Indian derivative markets have, in fact, been significantly outstripping the cash market, as documented in a report by Axis Mutual Fund. The report had also pointed out that the derivatives to cash volumes ratio in India was considerably higher than in other countries. Much of this increase has been driven by retail investors, most of whom have lost money in this segment, yet have continued to trade. As per a recent study by the stock market regulator, while 1.13 crore individuals have lost a staggering Rs 1.81 lakh crore trading in the F&O segment during the last three financial years, more than three-fourths of those who lost money in the preceding two consecutive years, continued to trade. This has been a source of concern in the policy establishment. The Economic Survey 2023-24 noted that as trading in these segments has the possibility of generating huge gains, it “caters to humans’ gambling instincts”. It is these considerations, the Survey argued, that “are likely driving active retail participation in derivatives trading.” In July, the Union budget raised the securities transaction tax on futures and options of securities — on futures from 0.0125 per cent to 0.02 per cent and on options from 0.0625 per cent to 0.1 per cent. In the same month, Sebi released a consultation paper that proposed steps to curb speculative trading in derivatives. And on Tuesday, it announced measures to tighten the norms around trading.

Six measures have been introduced. These range from increasing the contract size for index futures and options to Rs 15 lakh from Rs 5 lakh to Rs 10 lakh currently, to the upfront collection of option premium, rationalisation of weekly index derivatives products, and monitoring of position limits during the day, especially when there are large trading volumes on the expiry day, among others. Seen together, these measures are designed to raise the entry barrier for investors, making it more expensive to trade in the F&O segment. After all, a recent study by the stock market regulator had pointed out that roughly three-fourths of the traders — 65.4 lakh out of the 95.75 lakh individual traders — have a declared income that is less than Rs 5 lakh.