Indian capital market is complex, and the regulator cannot adopt a sledgehammer approach by imposing a threshold-based curbs on retail investors for trading in futures and options (F&O), said Tuhin Kanta Pandey, chairperson, Securities and Exchange Board of India (Sebi), on Saturday.
“Any regulator in any sector needs to balance these two sides,” the Sebi chief said at the Mint India Investment Summit and Awards 2025 in Mumbai.
He cautioned against a “sledgehammer approach”, stressing the importance of nuanced, data-driven regulation to avoid stifling innovation. “F&O itself is a complex market. We cannot have a sledgehammer or a blunt approach; we need a surgeon’s knife. We need to know exactly how otherwise innovations will be lost,” Pandey said.
Sebi introduced a set of six new measures on 1 October 2024 to skim the froth in the domestic derivatives market. Measures like increasing index contract sizes to ₹15-20 lakh, an additional 200-basis-point extreme loss margin of 14% for selling contracts on their expiry days, and only allowing weekly expiries for Nifty 50 and Sensex contracts came into effect from 20 November.
Measures like mandatory upfront collection of option premiums by brokerages and the removal of calendar spread benefits on expiry days kicked in on 1 February.
At the end of February, Sebi proposed revising the ₹500 crore exposure limit for index F&Os, along with changing the way of calculating open interest (OI).
However, the regulator decided to review the proposal to revise the limit after receiving feedback against such a rule from several market participants.
Mint reported on 19 March that stakeholders estimated the new gross limit would reduce liquidity and widen bid-ask spreads, raising the cost of executing a trade.
In the meantime, the sixth measure of intraday monitoring of position limits to strengthen the index derivatives framework, which was to go live on 1 April, was deferred after industry associations raised concerns over the readiness of systems at the stock brokers’ end and their clients to monitor existing position limits intraday for index derivatives.
When asked if retail participation in the F&O segment could be curtailed, Pandey argued that simply increasing the threshold would not address the underlying systemic issues. “We have taken steps in that regard. We found that more than 90% of small investors were losing. I think, there was not only an awareness element, but what we think is also a more systemic issue,” he said.
Pandey, however, highlighted the importance of F&O markets for hedging risks, price discovery, and the orderly development of the market.
