The Securities and Exchange Board of India (SEBI) is preparing for a significant board meeting on September 30, 2024. This meeting is expected to introduce several important reforms, particularly in the derivatives market, which could have a profound impact on investors and traders. SEBI has been working on strengthening the index derivatives framework, and new proposals will likely address key issues related to retail investor participation in derivatives.
Changes in Derivatives Trading Framework
The primary focus of SEBI’s meeting will be on reforms in index derivatives. SEBI has been concerned about the increasing number of retail investors engaging in derivatives trading for quick profits. According to a SEBI report, 93% of traders suffer losses in futures and options (F&O), raising alarms about the risks involved for individual investors.
To curb this, SEBI plans to introduce a new framework that includes limiting daily expiries of index derivatives and focusing only on weekly expiries. This move is aimed at reducing high-frequency speculative trades, which have become common among retail investors. Additionally, SEBI has proposed increasing the minimum contract size for derivative trades. As per the consultation paper issued on July 30, the new minimum contract value could initially be set at ₹15-20 lakh and later be increased to ₹20-30 lakh.
Impact on Retail Investors in F&O
The proposed changes could potentially reduce the participation of retail investors in F&O trading, a move that aligns with SEBI’s objective to safeguard small investors from the high-risk nature of these instruments. Both Finance Minister Nirmala Sitharaman and SEBI Chairperson Madhabi Puri Buch have previously raised concerns over the growing trend of retail investors venturing into risky futures and options trades.
Performance Validation Agency to be Discussed
In addition to the changes in derivatives, the SEBI board is likely to discuss the formation of a Performance Validation Agency (PVA). This agency will play a crucial role in verifying the performance claims made by intermediaries like research analysts (RAs), investment advisors (IAs), and algo traders. SEBI introduced this idea about a year ago and sought feedback from stakeholders, with an aim to bring more transparency to the market.
During an event organized by FICCI on August 2, SEBI Chairperson Madhabi Puri Buch stated that the Performance Validation Agency would soon become operational. This agency is expected to regulate the way intermediaries present their past performance to investors, ensuring that only accurate and validated claims are made. However, some technical challenges have delayed the launch, and the upcoming board meeting is expected to iron out these issues.
Streamlining Public Issue Regulations
Another key agenda item for the September 30 SEBI meeting is the potential rationalization of regulations related to public issues. SEBI had earlier talked about simplifying the Capital Issue and Disclosure Requirements (ICDR) regulations. The expected changes could streamline the listing process and enhance the ease of doing business for companies entering the market.
Additionally, SEBI may introduce modifications to the rules governing the appointment of directors and the classification of promoter and promoter group companies. These adjustments aim to make disclosure responsibilities clearer for top management positions within companies.
What to Expect from SEBI’s Meeting
With the expected changes in index derivatives, the creation of a Performance Validation Agency, and adjustments to public issue regulations, SEBI’s board meeting on September 30 will bring significant reforms to India’s financial markets. Investors, particularly those involved in derivatives trading and investment advisory services, will closely watch these developments.
