Following the announcement, shares of most of these companies plunged in the range of 1-13% on domestic markets on Wednesday. Major companies that have been excluded from the futures & options (F&O) segment include Jet Airways, 3i Infotech, Alok Industries, Gateway Distriparks, UTV Software Communications, TVS Motor Company and Wockhardt.
This is the largest number of stocks ever to be excluded from the derivatives segment by NSE at one stroke. Investors often use this segment to take a reverse positionor, buy for the future at low prices--to hedge against losses when they sell stock on the spot market. Now, their exclusion threatens to lower investor interest in these scrips.
Whenever a stock is excluded from the F&O segment, it is normal for investor sentiment to turn negative and it is usually hammered on the bourses, says Angel Broking fund manager & derivatives analyst Siddarth Bhamre. If this persists, it could create a vicious cycle in the long-term, reckons an analyst with an overseas financial institution.
With the exclusion of the 50, the total number of stocks traded on the NSEs F&O segmentIndias derivatives market is concentrated at the NSEcurrently stands depleted at 184. Once excluded, a scrip cannot be reinstated for a period of one year.
However, the excluded stocks collectively constituted barely 2% of total volumes in the derivatives segment, where 85% is dominated by index F&Os, while another 13% is constituted by highly liquid large cap stocks. On Tuesday, of the total open interest value of nearly Rs 22,000 crore in the stock F&O segment, the open interest value of these 50 stocks was just Rs 600 crore, according to market analysts. Most of the companies in the list do not have an impressive financial performance or are in industries with a weak outlook, explained one fund manager.
While Sebi had announced the new exclusion criteria in 2006, only on Tuesday did it send modifications to the exchanges urging immediate implementation. While the impact is not expected to be significant, the long-term portents are disconcerting for the market overall, say some experts.
However, others like ICICI Securities VP-derivatives segment TS Harihar have a counter view. The exclusion of these stocks from the F&O segment would help avoid unnecessary speculative build up in low-priced mid-cap stocks, which is healthy for the market, he said.
Sebis new exclusion criteria for companies in the futures segment state that if a market-wide position limit in a stock is less than Rs 60 crore and its median quarter sigma order sizea measure for volatility and liquidity--over the last six months is less than Rs 2 lakh, the share would become ineligible for trade in the F&O segment.
The regulator has also upgraded the criteria for stocks to be included in the F&O segment, according to the December 2008 recommendations of the derivatives market review committee. Now, a stock would be chosen from among the top 500 in terms of average daily market capitalisation and average daily-traded value in the previous six months on a rolling basis.
The stocks median quarter sigma order size over the last six months would also have to be not less than Rs 5 lakh and the market-wide position limit not less than Rs 100 crore, against the earlier Rs 50 crore.