The board of the Securities and Exchange Board of India (Sebi) also decided to ease voluntary delisting of companies and proposed a fee collection mechanism for registered investment advisors.
“In order to ensure that there is healthy linkage between cash market and the futures and options market. Second is criteria of which stocks will be permitted in F&O, we need to adjust those parameters,” chairperson Madhabi Puri Buch said. Thursday’s decision aims to ensure the continued development of a ‘vibrant’ securities market ecosystem with appropriate regulation and investor protection.
After the last change in selection criteria in 2018, the number of stocks in the derivatives segment fell for a brief period, but rose after the covid outbreak, said an 8 June Sebi consultation paper seeking public comments on the entry and exit of stocks in the derivatives segment.
The derivatives exit criteria will apply to only those stocks which have completed six months after entering the segment. For existing stocks in the derivatives segment, the exit criteria based on performance would be applicable six months from the date when the circular will be effective”, Sebi said. The circular is yet to be released.
Among the reasons behind Sebi’s move are the increase in cash market turnover, delivery volumes and volatility over the past six years. Changes in the spot or cash market also necessitated the revision of eligibility criteria for stocks to enter or exit the derivatives segment. This would prevent stocks with low liquidity and high volatility from entering the F&O segment, curbing manipulation of cash shares through the derivatives segment.
Analysts welcomed the move, adding the measures would have limited impact as stock futures’ share as a proportion of total turnover tends to be small compared with index options.
“Any regulatory measures to safeguard the interests of the small investor is a welcome move,” said Gaurav Dua, senior vice-president and head of capital market strategy at Sharekhan by BNP Paribas.
However, Dua added that most of the derivatives notional turnover was accounted for by index options, like Nifty and Bank Nifty. Thus, the revision in stock futures’ eligibility criteria would have limited impact .
Indeed, out of total notional turnover of ₹21,764 trillion on NSE so far this fiscal through 27 June, index options accounted for 98%, or ₹21,321 trillion turnover, with stock futures turnover being ₹101.44 trillion, or less than just half a percent.
“This is certainly a wise decision,” said Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research. He pointed out that the last update to the methodology was in 2018, and since then, market dynamics have changed considerably. Therefore, it’s important to stay updated and adapt to the current landscape, he said.
“This will bring new stocks into the F&O segment, expanding investment opportunities for investors and simultaneously creating more liquidity,” he said.
Finfluencers
The regulator also clamped down on regulated entities such as mutual funds and brokers dealing with so-called financial influencers. “The decision was taken to address concerns related to certain persons, including unregulated entities, inducing investors to deal in securities based on inappropriate claims, Sebi said in a press statement. It, however, added that financial influencers engaged in investor education will be exempt from the new restrictions.
It will be the responsibility of the regulated entity to ensure that individuals with whom it is associated do not breach the rules of conduct set by the Sebi, including avoiding the promise of assured returns, Sebi said.
Single-stock derivatives
Sebi also introduced a product success framework in single-stock derivatives to ensure that the liquidity and participation in the derivatives markets aid market development, regulation and investor protection. The framework will take effect six months from the date of the circular.
“The idea is to introduce the concept of product success framework, which means that exchanges can introduce a new index for F&O, and if the volume does not pick up or if it is not a success, it would be removed. If there is a contract which has thin volumes, it is vulnerable to manipulation. That money is very small. So, the same protection given to indices should be given to stock-specific F&O. If the trading doesn’t reach a certain minimum level, it will be open to manipulation; therefore, it may need to exit. For a minimum period of six months, the question is whether volume is picking up or not. With these two changes, there will be some stocks that will go out of the list and some which will come into the list,” the Sebi chief said. The framework will not cause too many exits; it is a system to ensure adequate liquidity in future, she added.
Voluntary delisting
The Sebi board also approved a fixed price process as an alternative to reverse book building (RBB) for voluntary delisting of companies whose shares are frequently traded. The fixed price offered must be at least 15% premium over the floor price as determined under Delisting Regulations.
The regulator also modified the counter-offer mechanism in case of delisting through the RBB process, reducing the threshold for making a counter-offer from the existing 90% to 75%, provided at least 50% of the public shareholding has been tendered.
“The counter-offer price shall not be less than the higher of the volume weighted average price (VWAP) of the shares tendered/offered under the RBB process, and indicative price, if any, offered by the acquirer”, the release by Sebi said. Adding that the delisting would be successful only when the post-offer aggregate shareholding of the acquirer reaches 90%,” ,it said.
Registered investment advisers
The board also approved the proposal to facilitate a mechanism on an optional basis for fee collection by Sebi registered Investment advisers (IAs) and research analysts. Sebi stated that the mechanism would facilitate investors for availing services and making payment of fees only to registered IAs ans RAs thus creating trust in the ecosystem.
“The mechanism shall facilitate investors for availing the services and making the payment of fees only to registered IAs and RAs, thus creating trust in the ecosystem. Given this, the mechanism shall give recognition to registered IAs and RAs and help investors differentiate them from unregistered entities acting as IAs and RAs. The mechanism has been kept optional based on public consultation” Sebi said.
Ram Sahgal and Dipti Sharma contributed to this story.
