Safety Net Or Entry Barrier? SEBI's New F&O Reforms

Khushi Lunawat, School of Law, CHRIST (Deemed to be University), Bengaluru

Introduction

In the realm of financial regulation, the challenge lies not in creating rules, but in crafting ones that foster growth while mitigating risk. The Capital Market regulator, Securities and exchange board of India (SEBI) had appointed an expert working committee last month to address the issue of excessive speculation driven by high retail participation in recent years1. The suggested changes follow a sharp rise in F&O trading volume and retail involvement.

The proposed changes come in the wake of a dramatic increase in F&O trading volume and retail participation. The SEBI figures show that derivative turnover has more than doubled from Rs 210 trillion in FY18 to Rs 500 trillion in FY24 and the retail investor participation in index options has jumped from 2% in FY18 to 41% in FY24. Moreover, it was also discovered that almost 90% of retail traders lose money in F&O trading, with an average loss of Rs 1.1 lakh in FY22. This has sparked worries about the social effects of widespread speculative trading given reports of people borrowing money to trade options.

The SEBI-appointed panel was scheduled to meet on July 152 to gather input from various market participants. This meeting is expected to provide a forum for broad suggestions from different stakeholders in the F&O market (Business Standard article).

After this meeting, the Secondary Market Advisory Committee will consider their recommendations. If the proposed changes lead to successful implementation, it could lead to a significant overhaul of the current offerings and regulatory framework in the F&O market.