Experts back Indian regulator's plan to overhaul index derivatives

Experts have backed the Indian regulator’s controversial proposal to limit retail investors’ use of equity options, a vast market that has taken off in India over recent years.

Speaking at the FOW Trading India 2024 conference on Thursday, a panel of regulatory experts backed the Indian regulator’s late July consultation paper designed to protect more securely retail investors in the derivatives market.

Speaking on a panel chaired by Shagun Madan, group chief compliance officer at National Infrastructure Trust, the panel of experts said the Securities and Exchange Board of India (SEBI) has been concerned about retail losses in the derivatives market for years.

Piyush Chourasia, chief regulatory officer at National Stock Exchange of India, told the delegation: “With multiple products, we have multiple expiries on multiple days so what has been happening is that people are just recycling their money. They were using the money they got out of this index to invest in the next index and then investing what they got back in the third index.”

Chourasia said SEBI has chosen to tackle this behaviour not by restricting retail access to the market but by restricting individuals’ activity.

The seven SEBI proposals include increasing contract sizes, collecting options premium upfront and reducing the number of weekly contracts individuals can trade.

Saurabh Saraswat, visiting professor of finance at Indian Institute of Management, added: “People have lost a lot of money, of that there is no doubt. Lots of people losing small amounts eventually ends up being a big amount.”

Saraswat referenced media reports that non-Indian market-makers have tried to make money from Indian retail investors, adding: “To that extent, I think it’s a welcome move by SEBI, to make it slightly more structured and regulated so it doesn’t appear like a casino or a gambling shop.”

Priya Subbarnam, independent director at Axis Asset Management, told the delegation: “This seems now to have become a bit of a game of sorts. I think that SEBI is doing the right thing because the fraud is unbelievable at this point.”

Indian equity options made up in the second quarter the six most-traded listed derivatives on the planet, driven partly by retail demand.