Brokerage houses have identified up to 78 stocks, including Zomato, YES Bank, Paytm, Varun Beverages and Adani Green, that could enter the futures and options (F&O) segment if the Securities and Exchange Board of India (Sebi) revises the eligibility criteria for entry and exit stocks in the derivatives market.
Only stocks from the derivatives segment can be included in the benchmark Nifty, Sensex and other indices, making Sebi’s review, the first in six years, of the eligibility criteria for stocks in the derivatives segment an important move, market experts said.
“Without sufficient depth in the underlying cash market and appropriate position limits for leveraged derivatives, there can be higher risks of market manipulation, increased volatility and compromised investor protection,” Sebi said in a consultation paper on Saturday, inviting public comments by June 19.
The proposed changes may result in the exclusion of several of the 182 stocks currently in the derivatives market due to consistently low turnover and open interest, making way for some recently-listed larger companies to enter the F&O segment.
Nuvama Alternative & Quantitative Research has identified 78 potential entrants, including Zomato, YES Bank, Paytm, IRFC, Adani Total Gas, BSE, Varun Beverages, Jio Financial, BEML, Rail Vikas, and LIC.
Torrent Pharma, Berger Paints, United Breweries, Syngene International, Bata India and City Union Bank could be removed due to low derivatives volume.
Similarly, IIFL Securities listed 77 stocks such as Gland Pharma, Tata Elxsi, Adani Green, Angel One, CDSL and Bank of India as potential additions. It has also predicted that 25 stocks, including Ramco Cement, Abbott India, Sun TV, and Gujarat Gas, might be removed based on the proposed criteria.
Sebi’s suggestions include higher limits for the market-wide position limit (MWPL), median quarter-sigma order size (MQSOS) and average daily delivery value in the cash market.
Additionally, a product success framework (PSF) for stock derivatives, akin to that for index derivatives, is proposed. “This is required to ensure that stocks have sufficient turnover, open interest and widespread participation. The criterion of six months is needed so that stocks have a sufficient gestation period,” Sebi said.
Sebi’s decision to review the eligibility criteria comes amid evolving market conditions and increasing participation of retail investors with an aim to ensure that only stocks meeting certain size and liquidity criteria in the underlying scrip are eligible for derivatives contracts.
If implemented, these changes could significantly alter the landscape of the derivatives market, which represents the majority of trading volumes.