Sebi plans tighter eligibility criteria for F&O inclusion

The Securities and Exchange Board of India (Sebi) is planning to tighten the eligibility criteria for inclusion of stocks into the equity derivatives segment, said three people with knowledge of the matter. The stricter rules could restrict the entry of various thinly-traded stocks into futures and options, they said.

The proposal was discussed in a recent Sebi-appointed Secondary Market Advisory Committee (SMAC) meeting. The capital markets regulator has sought feedback from the committee members on the matter, the people in the know said.

An email query sent to the Sebi went unanswered till print time.


For being eligible for inclusion or to remain in the derivative segment, Sebi is proposing that the average daily delivery value of a share should be at least ₹10 crore to ₹20 crore in the previous six months on a rolling basis. This could include shares delivered under the SLB or Securities Lending and Borrowing scheme too. An ET study shows only 135 listed stocks in India have daily delivery volumes of more than ₹20 crore over the six months.

The regulator has proposed to double the market-wide position limit from the existing ₹500 crore to ₹1,000 crore on a rolling basis, raising the bar for the inclusion of stocks into the segment. The market-wide position limit is the number of shares valued by taking the closing prices of stocks in the underlying cash market on the date of contract expiry in the month.

The stock's median quarter-sigma order size over the last six months could be increased from ₹25 lakh to ₹50 lakh. A stock's quarter-sigma order size is the order size in value terms required to cause a change in the stock price equal to one-quarter of a standard deviation.

Sebi may also include a clause that the stock should be traded by 15% of the registered brokers or at least 200 brokers, whichever is lesser, to be eligible for the F&O segment.

Newly-listed stocks would be eligible for entry into the F&O segment only after six months of listing, according to the proposed criteria.

Currently, over 195 stocks trade in the F&O segment on the NSE. Of these, around 60 may not meet the proposed eligibility criteria by Sebi, according to market participants.

"Though Sebi's intention could be to curb manipulation by ensuring only liquid stocks can trade in the F&O segment, it will deny investors the ability to hedge many stocks against volatility," said an analyst from a leading brokerage. "Sebi should increase the number of stocks in the F&O segment so that investors can have a good risk management strategy."

It is not clear how many of these proposals Sebi would implement since they are still being discussed.

Sebi last made changes to the F&O segment in October 2019, when it made it mandatory for all stocks in F&O contracts to be physically settled on expiry. Until then, all equity derivative contracts held till expiry used to be cash settled.