The Securities and Exchange Board of India (SEBI) is taking steps to reduce speculative trading in individual stocks.

These new rules announced by SEBI aim to create a more stable and reliable F&O market by ensuring that only well-established and actively traded stocks are included.

This should decrease speculative trading, enhance liquidity, and shift the market’s focus to long-term investments. These modifications are expected to create a more transparent and reliable trading environment for investors. 

What’s the Issue?

SEBI has observed an increase in speculative trading through “Futures & Options” (F&O) contracts, which allow investors to bet on future stock prices without owning the shares.

The regulator worries that such speculation distorts stock values and poses risks to investors. Particularly concerning are trends like last-minute buying sprees on expiring contracts, indicating short-term speculation over long-term investment.

SEBI’s New Regulations for F&O Segment

Stricter Criteria for F&O Inclusion

SEBI is tightening the requirements for stocks to be included in the F&O segment:

• Top 500 Companies: Only stocks from the top 500 companies by market capitalization and daily trading activity are eligible.

• Liquidity Requirements: Stocks must meet higher daily trading volumes and order sizes to ensure sufficient liquidity.

• Market-Wide Position Limit: A substantial limit of Rs 1,500 crore is set for total money that can be bet on a particular stock through F&O contracts, discouraging manipulation by smaller players.

• Higher Median Quarter-Sigma Order Size: The minimum order size is raised to Rs 75 lakh to ensure active trading.

• Increased Minimum Daily Delivery Value: The daily average delivery value is set at Rs 35 crore to ensure genuine market demand.

In simple terms, only well-established and actively traded stocks will qualify for F&O trading, reducing speculative bets on less liquid companies.

Removing Inactive Stocks

SEBI will remove stocks from the F&O segment if they become inactive:

• Active Trader Participation: At least 15% of active traders or a minimum of 200 members must participate in trading the stock.

• Daily Turnover: The stock’s average daily trading value must be at least Rs 75 crore.

• Open Interest: The average daily “notional open interest” must be at least Rs 500 crore.

These criteria ensure that only actively traded stocks stay in the F&O segment, reflecting real market activity.

Expert Group Review

SEBI has also formed an expert group to study the options market further:

• Investor Protection and Risk Management: The group will look for ways to enhance investor protection and manage risk.

• Healthy Market Development: They will explore strategies to develop a strong options market.

What This Means for Investors

Less Speculation

The new rules are intended to reduce speculative trading and make the market more focused on long-term investment strategies.

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Improved Liquidity

By removing less-traded stocks from F&O, overall liquidity in the segment should improve, making it easier for investors to enter and exit F&O contracts.

Impact on Existing Stocks

Some stocks might be removed from the F&O segment if they don’t meet the new criteria, but the overall impact is expected to be limited.

Simplified Delisting Process

SEBI has also simplified the process for companies seeking to delist from stock exchanges. Instead of depending only on a book-building process, companies can now offer a fixed price to buy back shares, making delisting more efficient and cost-effective. This update recognizes valid reasons for companies to become private and makes the process easier.

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Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered investment advisor before investing.