Household savings going into speculation, says Sebi chief; revises F&O selection norms

Sebi revised the criteria for F&O stock selection, although it will not lead to a massive increase or decrease in the number of stocks in the derivatives segment.
SEBI Chairperson Madhabi Puri Buch (Photo | PTI)
SEBI Chairperson Madhabi Puri Buch (Photo | PTI)

MUMBAI: With the F&O volume more than doubling in the past six years from Rs 210 trillion in FY18 to Rs 500 trillion in FY24, making the country the largest in the world with over 85 percent of the global derivatives volume, regulators have been concerned. This has prompted the markets regulator Sebi to take concrete action.

Of this total, more than 95 percent is traded on the NSE alone, making it the world’s largest F&O exchange.

In a board meeting on Thursday, Sebi revised the criteria for F&O stock selection, although it will not lead to a massive increase or decrease in the number of stocks in the derivatives segment.

Addressing the media after the board meeting, Sebi chairperson Madhabi Puri Buch said it has been decided to constitute an expert group to examine the F&O segment, which will submit a report to the Secondary Market Advisory Committee.

“Household savings are increasingly being directed towards non-productive activities, particularly speculation. This has resulted in a significant surge in F&O trading over the past six years. While the overall turnover was Rs 210 trillion in FY18, it has surged to Rs 500 trillion in FY24,” Buch said.

This sentiment was echoed recently by RBI Governor Shaktikanta Das.

“Individual investors in index options increased to 41 percent in FY24 from just 2 percent in FY18,” Buch added, noting, “we have observed instances of individuals borrowing money for speculative trades. This is not a healthy trend.”

Explaining the rationale behind the move, she said the regulatory approach is two-fold. First, to ensure a robust linkage between the cash market and F&O market. Years ago, Sebi had mandated physical delivery of open positions on expiry. The second step is the revision of criteria for stocks permitted in F&O based on their behavior in the cash segment, necessitating adjustments to these parameters. A detailed circular will be issued in due course.

She also said that stock derivative volumes that fail to meet set thresholds over six months will be discontinued under the product-success framework for stock derivatives introduced today.

Buch said this is introduced to reduce the possibility of market manipulation through illiquid securities. Trading volumes will be watched for six months and if they do not cross a threshold, then the derivatives will be discontinued, she told reporters at the post-board meeting presser.

This move will see the total number of stocks in F&O segment will go up by a handful, she added.

In another decision, Sebi has eased norms for the voluntary delisting of stocks from exchanges by introducing a fixed-price process as an alternative to the reverse book-building process, with a minimum threshold of 90 percent participation.

The fixed price offered by an acquirer must be at least 15 percent higher than the floor price determined under the delisting regulations, Sebi said after the board meeting.

Addressing the media, Sebi chairperson Madhabi Puri Buch said companies opting for this new framework must set the minimum price at the floor price under the delisting regulations, plus an additional 15 percent premium. The major changes are aimed at facilitating voluntary delisting, she said during a press briefing.

According to Buch, the board has introduced the fixed price process as an alternative to the reverse book-building process. Companies opting for this must set the minimum price at the floor price under the delisting regulations, plus an additional 15 percent premium. This provides companies with greater flexibility in their delisting strategy.

Through a scheme of arrangement, Buch said these companies can do selective capital reduction. "They will be able to pass on the benefit of the encashment of their holdings to the extent that they are holding liquid shares to their investors," she said. At least 75 percent of their value should be in listed companies.

Additionally, if the investing company is regulated by another regulator, Buch said they will need to comply with that regulator's framework as well. The third flexibility announced is that the counter-offer mechanism has been made more flexible. Previously, the threshold for making a counter-offer was 90 percent subscription. Now, it has been reduced to 75 percent, provided at least 50 percent of public shareholding has been tendered.

The Sebi has introduced an alternate delisting framework for listed investment holding companies through a scheme of arrangement by way of selective capital reduction provided there is at least 75 percent of their fair value of net liabilities comprising direct and investments in the equity of the listed companies and if the threshold is met, they are free to transfer the shares to other companies.

According to Sebi, if the holding company is delisted, the entire public shareholding will be extinguished.

In another decision, the Sebi board has relaxed the additional disclosure framework for select foreign portfolio investors, such as university funds and university-related endowments. These new disclosure norms were introduced in August 2023 for others. However, conditions such as a 25 percent equity exposure of its global AUM or a Rs 10,000 crore AUM cap also apply to these exempted entities.

On the alternate investments funds, which had been under both RBI and glare of late, the Sebi has allowed them to borrow for 30 days if the borrowing is only meant for meeting temporary shortfall in drawdown from investors.

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