ANALYSIS: Indian capital markets in process of development

India remains a largely underdeveloped marketplace which is why the regulator is intervening to limit retail investor losses in the country’s equity options market, a panel of experts has suggested.

Speaking at the FOW Trading India 2024 conference on Thursday, a panel of trading experts discussed the Indian regulator’s late July consultation paper designed to protect more effectively retail investors trading in the equity derivatives market.

The seven Securities and Exchange Board of India (SEBI) proposals include increasing contract sizes, collecting options premium upfront and reducing the number of weekly contracts individuals can trade.

Shiv Sehgal, president and head of Nuvama Capital Markets, told the delegation India’s growth post-Covid has been unparallelled and this has presented a unique set of challenges for the country’s regulators and market operators.

Indian equity options made up in the second quarter the six most-traded listed derivatives on the planet, driven partly by retail demand.

“India is a nascent market in that ecosystem. We are a plain vanilla equity derivative, we don’t have structured products, we don’t have a robust debt market as such compared with the size of our equity markets. So I think a lot of things need to evolve in that ecosystem if we aspire to that $15-$20tn (£11.2tn-£15tn) market cap.”

Sachin Samant, president and business head at Kotak Mahindra Bank, said the average amount being lost by retail investors is 600 rupees (£5.40) which is not a large amount, adding: “Retail participation is increasing in equities and derivatives, and more than 85% of them lose money.

“Why is that happening? Maybe it’s because off easy access and that the markets are doing so well, therefore everybody wants to participate in some form or another. In all financial markets speculators are important part of the ecosystem but speculation comes in different forms.”

Sehgal added: “In the SEBI consultation paper, while they are discussing that 90% of options traders lose money, I think we need to recognise they could be making a lot more money in the cash market so what is the underlying usage of the derivatives instruments? Is it for arbitrage? Is it speculation?”

He also expressed his preference that the regulation be implemented carefully: “I don’t view they will be implemented in one go, I think the ecosystem is not ready so I don’t think that will be the right strategy.”

Sunil Ramrakhian, chief business officer at BSE, backed the regulatory move, telling the conference: “I don’t think the regulators should do or not do something based on what somebody perceives this to be. We should do what is right rather than what is convenient or what will be perceived well.”

Speaking on an earlier panel chaired by Shagun Madan, group chief compliance officer at National Infrastructure Trust, experts said SEBI has been concerned about retail losses in the derivatives market for years.

Piyush Chourasia, chief regulatory officer at National Stock Exchange of India, told the delegation: “With multiple products, we have multiple expiries on multiple days so what has been happening is that people are just recycling their money. They were using the money they got out of this index to invest in the next index and then investing what they got back in the third index.”

Chourasia said SEBI has chosen to tackle this behaviour not by restricting retail access to the market but by restricting individuals’ activity.

Saurabh Saraswat, visiting professor of finance at Indian Institute of Management, added: “People have lost a lot of money, of that there is no doubt. Lots of people losing small amounts eventually ends up being a big amount.”

Saraswat referenced media reports that non-Indian market-makers have tried to make money from Indian retail investors, adding: “To that extent, I think it’s a welcome move by SEBI, to make it slightly more structured and regulated so it doesn’t appear like a casino or a gambling shop.”

Priya Subbarnam, independent director at Axis Asset Management, told the delegation: “This seems now to have become a bit of a game of sorts. I think that SEBI is doing the right thing because the fraud is unbelievable at this point.”