Sebi's stricter F&O inclusion criteria may weed out 30 stocks: Analyst

Concerned about a large retail presence in the derivatives segment, the Securities and Exchange Board of India (Sebi) is planning to introduce stricter filters for futures and options (F&O) stocks.
 
According to sources, the secondary market advisory committee of Sebi has discussed tweaking of criteria, such as impact cost, position limit, and delivery volumes, to ensure only liquid counters continue to be a part of this segment.
 
According to the current rule around impact cost, a stock’s median quarter-sigma order size over the past six months cannot be not less than Rs 25 lakh. This could be hiked to Rs 50 lakh. Similarly, the market-wide position limit is likely to increase from Rs 500 crore to Rs 1,000 crore.
 
While the average daily delivery value in the cash market cannot not be less than Rs 10 crore in the previous six months on a rolling basis, this could double to Rs 20 crore. Further, to avoid trade concentration, an F&O stock will have to be traded by 15 per cent of registered brokers, or at least 200 brokers — whichever is lower.
 

Stocks that are part of F&O but fail to meet these requirements for three consecutive months will be kicked out of the F&O segment once the outstanding contracts expire.
 


The proposed rules are still in the discussion stage. In the event these are implemented, about 30 F&O stocks may get removed, according to an analysis by analyst Brian Freitas of Periscope Analytics.
 
At present, 195 single stocks are part of the National Stock Exchange’s derivatives segment.
 
“We have run the numbers on the quarter-sigma order size, market-wide position limit, and the average daily delivery value to come up with a list of stocks that could be excluded from the F&O segment of the market. We see 30 stocks that do not meet the criteria to remain in the F&O segment — these stocks failed to meet the proposed limits in the last three consecutive months (May, June, July),” said Freitas in a note published on Smartkarma. Some of these include Abbott India, Sun TV, Hindustan Copper, and Torrent Power.
 
Another dozen stocks could be on thin ice since they have failed to meet the proposed thresholds in one or two of the past three months. These include IDFC, Manappuram Finance, and Max Financial.
 
“There are many more stocks that failed the proposed market-wide position limit, while there are a lot more that failed the proposed threshold for average daily deliverable value,” added Freitas.
 
In July, the average daily turnover (ADTV) for the cash market segment stood at Rs 46,602 crore. On the other hand, the ADTV for the F&O segment was nearly Rs 11 trillion (on a notional basis).
 
The cash-to-derivatives turnover ratio for India is one of the highest in the world.
 
Sebi in the past has expressed concerns over increased retail participation in the derivatives segment. In 2019, Sebi moved to compulsory physical settlement of derivatives contracts. Many retail traders continue to prefer the derivatives segment as it offers more bang for the buck, although this comes with high risk-taking.