 "New limit for derivatives trading may benefit investors")
The Securities and Exchange Board of India (Sebi) reportedly plans to raise the minimum contract size for trading in equity derivatives. The lot size will be raised from the existing Rs 2 lakh to Rs 5 lakh or Rs 10 lakh.
This is the first time since derivatives trading kicked off in India that the market regulator plans to raise the limit for the minimum contract size.
Sebi had earlier done away with the mini futures and options contracts to discourage small investors from entering the derivatives segment. As per current norms, the value of the derivative contract cannot be less than Rs 2 lakh.
A few months back, the NSE cut the lot size of Nifty Futures contract to 25 from 50 earlier.
Will the increase in contract size benefit investors? According to experts, it's a way for Sebi to make trading in the segment more expensive.
“It's an indirect way of telling investors that they need to be extra careful while trading in this segment,” said Arun Kejriwal, an investment analyst.
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“Derivatives by design is a high-risk segment. It is essentially a leveraged product where one can take 100% exposure by paying 15-20% of the contract value upfront. For retail investors who are aware of what they are doing and capable of taking high risks, the new entry barrier could spell bad news. On the other hand, this is a good way of keeping out investors who do not have the capability or the risk-taking capacity to dabble in the segment,” said Kejriwal.
Experts reckon the market regulator's move may have been prompted by the fact that the limit has remain unchanged since trading in the derivatives segment was allowed more than 15 years ago.
“The decline in the value of the rupee in absolute terms may have prompted the regulator to re-look at the limit. This is exactly the same reason why they raised the upper limit of Rs 1 lakh for retail applicants for initial public offerings to Rs 2 lakh a few years ago,” said Kejirwal.
According to sector observers, the new norms may lead to an increase in off market trades or informal arrangements between investors and brokers.
“The broker may trade in his name, and then informally settle the gains or loss off market with the investor,” said Kejriwal.