New eligibility norm to weed out a fifth of F&O stocks

In the largest exclusion ever, NSE to remove 51 stocks that fail to meet new Sebi criteria

The new eligibility criteria for the derivatives segment will weed out about a fifth of the current crop of stocks in the futures and options (F&O) segment.

In the largest exclusion ever, the National Stock Exchange (NSE) has decided to remove 51 stocks from the derivatives segment after the September series expiry. Existing contracts for July, August and September in these counters would continue to be available for trading. From the October series, the number of stocks in the derivatives segment will be down to 157 from the current 208.

This is the single largest exclusion of stocks from the F&O segment since 2009, when NSE had removed 50 stocks.
 

REMOVING THE ILLIQUID
Some of the 51 stocks that will be excluded from the NSE F&O segment 

• Aban Offshore
• Bajaj Hindusthan
• Balrampur Chini
• Bharat Electronics 
• IIFL
• Indian Bank
• Orchid Chemicals
• Rolta
• VIP Industries

The move comes after Securities and Exchange Board of India (Sebi) tightened the criteria for retaining and including stocks in the derivatives segment to ‘improve market integrity’.

Many experts welcomed the move saying it will be positive for the market in the long term as the market depth will improve.

“Tightening of the eligibility criteria will help in creating a healthy derivatives market. Only the counters that have real depth will remain, while it will see removal of illiquid counters. This will also help in reducing the volatile counters from the F&O series,” said Yogesh Radke, head of quantitative research, Edelweiss Securities.

“The move will ensure that only large and liquid names are part of derivatives trade. The removal of illiquid stocks is good for the market, as it will help curb speculative trades,” said Siddharth Bhamre, head of derivatives at Angel Broking.

Even though the NSE circular came after market hours, the list of probable names of stocks to be excluded was doing the rounds. It, however, have had adverse impact on the share prices in these counters. Derivatives experts said the open interest and activity will come down substantially in the next series.

Experts also pointed out that removal of 51 stocks won’t have any significant impact on the overall volume as these counters contributed less than five per cent of the total F&O volumes.

Under the new selection/exclusion criteria for F&O stocks, Sebi has tripled the market-wide position limit (MWPL) requirement, more-than-doubled the median quarter sigma order size (MQSOS) and introduced a new criterion — an average monthly turnover of at least Rs 100 crore — for retaining stocks in the derivatives segment.

According to the new norms, the MPWL, which is the total number of active contracts for a given underlying at any point in time, has to be a minimum of Rs 200 crore for a stock to remain in the F&O segment.

The MQSOS, which is the order size required to cause a change in the stock price equal to one-quarter of a standard deviation, has increased to Rs 5 lakh from Rs 2 lakh.

Some of the stocks that have failed to meet the criteria include Aban Offshore, Bajaj Hindusthan, Balrampur Chini and VIP Industries.

Once a stock is removed from the F&O list, it cannot not be included in it again for a period of one year.