The Securities and Exchange Board of India (Sebi) may consider rolling out a product suitability framework to ensure that only informed and capable investors participate in complex derivative instruments.
The framework of checks and protocols, typically implemented by brokers and intermediaries, matches financial products with an investor’s risk appetite, investment experience, financial capacity, and objectives. In effect, it aims to ensure that investors, especially retail clients, are not exposed to risks they do not understand or cannot absorb.
The initiative may involve vetting clients’ profiles, assessing their risk appetite, providing enhanced risk disclosures, and restricting access to risky products if suitability criteria are not met.
Sebi whole-time member Ananth Narayan underscored the regulator’s openness to objective and simple mechanisms to ensure that derivative participation is informed, suitable, and appropriate in a keynote speech at the capital markets conference organized by FICCI on Thursday in Mumbai.
“Equally important is ensuring risk awareness and suitability among participants. We are open to objective and simple mechanisms to ensure that derivative participation is informed, suitable, and appropriate. Here again, stakeholder engagement will be key—we are open to all constructive ideas,” Narayan said during his address, offering one of the clearest signals yet that the futures and options (F&O) market could see targeted regulatory interventions.
Narayan also hinted at a potential regulatory move towards longer-dated derivative contracts. “We are considering ways to improve the tenor and maturity profile of derivative products, so that they better support sustained capital formation and foster all-around trust in the ecosystem,” he stressed, adding that “this may also need to be achieved in a calibrated manner, giving the system adequate time to adjust”.
The remarks come as retail participation in India’s equity derivatives market is soaring, prompting fresh scrutiny of investor protection standards.
In fact, Sebi chairperson Tuhin Kanta Pandey mentioned on the sidelines of the same event earlier in the day that the regulator was consulting with market participants to explore fortnightly or monthly expiring derivative contracts in index options to curb volumes in the derivative space.
Mint reported on 9 August that the regulator was looking to revise the weekly contract expiry schedule if its recent measures fail to cool the index options fever. Among the plans under consideration: Expiry every fortnight against the weekly system now, and only one expiry in a fortnight against twice a week now.
Narayan highlighted the ongoing “revolution” in India’s capital markets, pointing to net equity purchases of ₹6.1 trillion by mutual funds in 2024-25—a record, and more than double the previous high. Alternative investment funds (AIFs) channelled a cumulative ₹13.5 trillion in commitments, with flows into AIFs now rivalling those into mutual funds.
While the surge in domestic participation buoyed primary market issuances, the Sebi official stressed the parallel need for robust investor education, risk awareness initiatives, and thoughtful engagement with market participants.
The speech also touched upon measures to relax compliance for sophisticated global investors and the proposed SWAGAT-FI regime for trusted foreign portfolio investors.
“Preserving trust is the single most important ingredient of healthy markets,” Narayan said, arguing for a balance between protecting investors and avoiding regulatory overreach that could curb innovation or participation.
