The mutual funds (MFs) are set to be barred from using derivative products to leverage portfolios, meaning they may not be allowed to write options at all.
This takes away one of the key players with enough financial muscle from the option writing business.
MFs would be allowed to use derivative products only for hedging and portfolio balancing purposes, the Securities and Exchange Board of India (Sebi) full-time board member Jayanth R Varma said.
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"The asset management companies (AMCs) must first obtain the approval of their board of trustees to qualify for trading in derivatives. The trustees must determine whether the AMCs have the expertise to trade in derivative products, when granting their approval," Varma said.
According to him, so long as the AMCs adhere to these and certain other guidelines, MFs would not have to give investors exit options, which they normally have to, for any alteration in investment objectives of schemes.
Commenting on the expertise available with the MFs, Varma said, "I am told, boards of certain AMCs are not convinced with their expertise in dealing in derivative products, and are not very willing to grant their approval. But so far large MFs like Unit Trust of India (UTI) are concerned, it would be very surprising if they are found not to have the required expertise to trade in derivative products."
Asked whether there was any possibility of the market watchdog deciding to examine the eligibility of the AMCs in terms of expertise directly, Varma said, Sebi would be relying totally on the certificate of the trustees of the AMCs for it.
"We examine the track record of the people on the board of trustees of AMCs at the time of their inception and thus have an indirect check," Varma said, while admitting that Sebi does not, however, monitor fresh recruitments made by the AMCs.
Speaking on the prospects of derivative products gaining popularity with the MFs, Varma said: "Internationally, there are a number of MFs which do not invest in derivative products at all, but there are also a number of situations where MFs can benefit from exposure in derivative products. But for them to take interest in the segment, the market has to grow and have enough depth, which can take some time."
Funds invested in blue-chip shares, or in volatile scrips are likely to take interest in derivative products, but for all MFs particularly UTI, the foremost task is to identify the schemes which require the support of hedging tools, Varma added.