ANANTH NARAYAN, a whole-time member at Securities and Exchange Board of India (Sebi), on Thursday expressed concerns about short-term derivative products, saying they detract from capital formation, while stressing the need to boost cash equities trading. Industry and the regulator should look for further ways deepen the cash equities markets, he said.
Short-term derivatives dominate volumes. Research indicates expiry-day option trading increases volatility and leads to noise trading “This undermines confidence in price formation,” Narayan said at a Cl I conclave.
The Sebi director observed that on expiry days, comparable turnover in index options are often 350 times or more than the turnover in the underlying cash market.“The imbalance is obviously unhealthy,” he said.
“There is no question that derivatives and speculation are vital for price discovery, hedg-ingand ensuring market depth. But certain trends have warranted a closer look,” he said.
Around 91% of individual traders incurred net losses in derivatives in FY25,with aggregate losses crossing fl lakhcrore.
“This is a large sum of money that could have otherwise gone towards responsible investing and capital formation,’”Narayan said.
He observed that while, Sebi recognises the potential concerns of market infrastructure institutions (Mils), brokers and other intermediaries, whose revenues may depend heavily on these short-term derivative volumes, it is not sustainable.
“We are seeing some signs of moderation ofthetrends.There is a win-win that we must cocreate, where sustained capital formation is supported, while providing sustainable revenue streams for all stakeholders,” Narayan said.
The number of unique demat account holders has more than trebled over the last five years, to more than 100 million. Over last six years, Indian savers poured in ?18 lakh crore ($ 210 bn) into equity risk-oriented mutual funds, including hybrid funds.
Assets of such MF schemes have risen overfourtimes,from f 12 lakh crore in June 2019 (pre-Covid),to f 53 lakh crore. Nearly half of all MF folios are from beyond the top 30 cities.
“Even as domestic flows into our equity markets have dwarfed flows from Foreign Portfolio Investors (FPIs) in recent years, FPIs remain a crucial and welcome stakeholder into our markets,” Narayan said.
As of June end, FPI assets in Indian equity markets stood at over f 74 lakh crore ($860 bn). “This has been and will continue to be a symbiotic relationship,” he said.
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