SEBI Proposes New Rules to Protect Small Investors in India
The Securities and Exchange Board of India (SEBI) has introduced new proposals to safeguard small retail investors from the high risks associated with derivative trading. These proposals were outlined in a consultation paper released on Tuesday.
Key Proposals
SEBI has suggested increasing the minimum contract size for Futures and Options (F&O) trading. Currently, the minimum size is between Rs 5 lakh and Rs 10 lakh. SEBI proposes to raise this to Rs 15-20 lakh initially and then to Rs 20-30 lakh in the second phase. This change aims to deter small investors from participating in high-risk trades.
Another significant proposal is the mandatory upfront collection of options premiums from buyers. This measure is intended to prevent undue intraday leverage and discourage practices that allow positions beyond the collateral.
Additional Measures
SEBI also recommends that position limits for index derivative contracts be monitored on an intra-day basis by clearing corporations and stock exchanges. The paper suggests a uniform strike interval near the prevailing index price and a gradual increase as strikes move away from the prevailing price.
To enhance market stability, SEBI proposes that weekly options contracts be provided on a single benchmark index of an exchange. Additionally, the Extreme Loss Margin (ELM) is proposed to be increased from 3% to 5% to address high notional risks near contract expiry.
Background
These proposals follow the findings of an Expert Working Group and deliberations by SEBI’s Secondary Market Advisory Committee. The regulator noted that in FY24, 92.5 lakh retail investors and proprietorship firms suffered losses amounting to Rs 51,689 crore.
Doubts Revealed
SEBI -: SEBI stands for the Securities and Exchange Board of India. It is a government agency that regulates the stock market and protects investors in India.
small retail investors -: Small retail investors are regular people who invest their own money in the stock market, usually in small amounts.
high-risk derivative trading -: High-risk derivative trading involves buying and selling financial contracts whose value is based on the price of other assets, like stocks or commodities. It can be very risky and complicated.
minimum contract size for F&O trading -: F&O trading stands for Futures and Options trading. The minimum contract size is the smallest amount of these contracts that can be traded. Increasing this size means you need more money to trade.
upfront collection of options premiums -: Options premiums are the price you pay to buy an options contract. Upfront collection means you have to pay this price right away when you make the trade.
undue leverage -: Undue leverage means borrowing too much money to invest, which can be very risky if the investment doesn’t go well.
position limits -: Position limits are rules that limit the amount of a particular asset you can hold in your trading account. This helps prevent too much risk.
Extreme Loss Margin -: Extreme Loss Margin is extra money that traders must keep in their accounts to cover potential huge losses. It acts as a safety net.
Expert Working Group -: An Expert Working Group is a team of specialists who study a problem and give advice on how to solve it.
Secondary Market Advisory Committee -: The Secondary Market Advisory Committee is a group that advises SEBI on how to improve the stock market where people buy and sell existing shares.
