In an effort to inject liquidity into stock options and futures, the capital market regulator Sebi from Thursday permitted stock exchanges to introduce liquidity enhancing schemes (LES) for illiquid stocks in the equity derivative segment. Currently, index futures and options (F&O) and few stock counters comprise bulk of the derivative turnover volumes.
Sebi has allowed LES to be introduced for new as well as existing listed securities. In case of already listed securities, the eligibility criteria is average trading volume for the last 60 trading days on the stock exchange being less than 0.1% of the company?s market capitalisation.
The Sebi allowed incentives under LES to be introduced in either of the two forms. Either as a fee discount, adjustment in fees in other segments and cash payments, or as shares, including options and warrants, of the stock exchange.
?If a stock exchange chooses the fee discount option, the incentive under all LES, during a financial year shall not exceed 25% of the net profits or 25% of the free reserves of the Stock Exchange, whichever is higher, as per the audited financial statements of the preceding financial year,? said a Sebi circular.
However, if the exchange chooses the second option, the shares, including the shares that may accrue on exercise of warrants or options, given as incentives under all LES, during a financial year, shall not exceed 25% of the issued and outstanding shares of the Stock Exchange as on the last day of the preceding financial year.
The capital market regulator added that LES would be discontinued as soon as the average trading volume on the stock exchange, during the last 60 trading days, reaches 1% of market capitalisation of the underlying, or six months from introduction of the scheme, whichever is earlier. The Stock Exchange have been asked to submit half-yearly reports on the working of its LES to Sebi.
?We welcome the Sebi framework and principles for the LES. It gives flexibility to the stock exchanges to launch appropriate LES suiting their business objectives. We believe that this would help to develop and deepen the derivative markets in India both in terms of depth and breadth.? Madhu Kannan, MD and CEO of Bombay Stock Exchange.
Several stocks in the derivatives segment on Thursday clock barely enough volumes in the segment. Of the 223 companies in the stock F&O segment, about 50 companies have a daily trading turnover of less than R5 crore each.
Nearly 76% of the stocks command a trading turnover of less than R50 crore.