Gupta Assures Small Players In Derivatives Trade

L C Gupta, the architect of the report that prescribes the regulatory framework for introduction of derivatives trade in the country, yesterded allayed fears that small players would not be able to participate in the trade because of Securities & Exchange Board of India's (Sebi) decision to fix the minimum contract size at Rs 1 lakh.

"The flow of Rs 1 lakh is not very high since the amount to be required to be deposited with the broker would be just the margin of 10 per cent or so. At no point of time will the investor be required to pay Rs 1 lakh because the transaction would ultimately be settled on the basis of the difference in prices," Gupta said at a workshop organised by Federation of Indian Chambers of Commerce & Industry in New Delhi yesterday.

National Stock Exchange vice-president Ashish Chauhan said the bourse has put in place all the infrastructure required for derivative trading. "We are only waiting for the mandatory approvals. We expect to start trading withing three months of the amendment to Securities Contract Regulation Act," he said.

The SCRA is to be amended to include derivatives among securities. The amendment can be carried out through issue of a notification.

Chauhan said there had been instances of derivative trading becoming conduit for mismanagement, but these had occurred mainly due to a lack of suervisory and regulatory mechanisms. The case of Barings, he said, could be an exception and with checks nad balances, such occurrences can be toally eliminated from the Indian scene.

Earlier, Gupta had said that derivatives make the world simpler by giving the buyers the ability to manage mand transfer risks. But in the hands of speculators, they could be strong leverage instruments. Nevertheless, the primary purpose of derivatives _ hedgding against risks _ was a commercial need, he pointed out.

"The time-tested instruments like derivatives can help hedge against heavy losses and can provide a finality to the returns one receives thereby minimising the risk.

Gupta however said that the expectations regarding what derivatives could do in the Indian capital markets were not realists. "The problem of Indian capital markets lies elsewhere; in the confidence the investor has in the corporate entities," he said.

Gupta emphasised that keeping derivative trade open to individual investors was essential to ensure sufficient liquidity in the market.