Several stocks including Paytm, PB Fintech, Nykaa, Delhivery, LIC, and Adani Green could possibly enter the F&O trading segment on SEBI's proposed changes in eligibility criteria for the derivatives market
The SEBI on has published a consultation paper elaborating the need to review the eligibility criteria of stock derivatives in line with the current market growth
SEBI has asked for public comments on the proposal to be submitted by June 19, 2024
New-age tech stocks Zomato, Paytm, PB Fintech, Nykaa and Delhivery could possibly enter the futures and options (F&O) trading segment, said Nuvama Institutional Equities in a research note following the markets regulator Securities and Exchange Board of India’s (SEBI’s) newly proposed eligibility criteria for the derivatives market.
The SEBI on Saturday (June 8) published a consultation paper elaborating the need to review the eligibility criteria of stock derivatives in line with the current market growth. In the consultation paper, the regulator noted that derivative markets enhance price discovery and market liquidity.
“However, without sufficient depth in the underlying cash market, and appropriate position limits around leveraged derivatives, there can be higher risks of market manipulation, increased volatility, and compromised investor protection,” it said.
“To help develop the securities market while being mindful of these concerns, SEBI last established a framework in 2018 for the selection of stocks eligible for derivatives trading. Given the evolving market context since then, we now propose to update this framework and its criteria accordingly,” added SEBI.
For the uninitiated, derivatives are financial contracts between two parties, whose value is linked to the value of their underlying assets such as stocks and commodities. In the derivatives market, investors trade in derivatives instruments, including forward contracts, swap contracts, and futures and options. These contracts are traded both over the counter and via exchanges, such as the BSE and NSE in India.
As per Nuvama, based on SEBI’s consultation paper, several stocks are at a high risk of facing removal from F&O trading while many others could be added if the proposed criteria are implemented.
Besides some of the major new-age tech stocks mentioned above, Nuvama sees the addition of other stocks like Jio Financial Services, Infibeam Avenues, LIC, Olectra Greentech, Adani Green, Adani Total Gas, Tata Elxsi, and Piramal Pharma, among several others.
On the other hand, the brokerage sees stocks including Abbott India, J K Cements, Bata India, and Sun TV Network facing removal from F&O trading.
To be sure, the SEBI has proposed eligibility criteria for the entry and exit of stocks in the derivatives segment, which include:
- Increasing the median quarter sigma order size (a derivative trading rule) to INR 75 Lakh-INR 1 Cr from the earlier required size of INR 25 Lakh.
- Increasing the market-wide position limit on a rolling basis to INR 1,250 Cr-INR 1,750 Cr compared to INR 500 Cr earlier.
- Increasing the stock’s average daily delivery value in the cash market to INR 30 Cr-INR 40 Cr from INR 10 Cr earlier.
SEBI has also introduced product success framework (PSF) for stock derivatives, which will be only applied to those stock derivatives that completed at least six months from the month of introduction.
“Currently, the product success framework is only applicable to index derivatives. The said framework mandates that derivatives on an index should have sufficient turnover, open interest, and widespread participation. If any index fails to satisfy any of these criteria, then no fresh contracts shall be issued on that index. On similar lines, it is proposed to introduce additional exit criteria for single stock derivatives, based on performance of derivative contracts,” said SEBI in its consultation paper.
SEBI has asked for public comments on the proposal to be submitted by June 19, 2024.
