The Securities and Exchange Board of India (SEBI) has expressed concerns regarding the rising risks associated with derivative trading in India, particularly due to the significant increase in participation by small and retail investors.
The number of Demat and Trading accounts in India has seen a significant surge in recent years, driven by increased investor participation in the stock market and ease of opening online accounts.
As of March 2024, the total number of Demat accounts in India crossed the 15 crore (150 million) mark for the first time. This represents a substantial increase from the previous year, with an average of 30 lakh (3 million) new accounts being added every month in FY2024.
The major depositories, CDSL and NSDL, collectively recorded a year-on-year increase of 11.9 percent, highlighting the rapid growth in this sector.
Key concerns raised by SEBI:
Increased retail participation: The proportion of retail investors participating in the derivatives market has grown considerably, raising concerns about their understanding of the complexities and risks involved.
Higher risk for retail investors: Derivative trading involves leverage and complex strategies, which can lead to substantial losses for investors, especially those who lack experience and risk management skills.
Potential impact on cash markets: The increasing volumes in the derivatives market could have spillover effects on the underlying cash markets, leading to volatility and price distortions.
Shorter-duration options: The growing popularity of short-duration options, especially in indices with few stocks and high volatility, amplifies leverage and increases the risk of sudden market movements.
SEBI’s response:
Warning to investors: SEBI has issued warnings to investors about the risks associated with derivative trading and emphasized the importance of understanding the products and strategies before investing.
Stricter norms for stock inclusion: SEBI has approved stricter norms for including individual stocks in the derivatives segment to ensure only liquid and financially sound stocks are eligible.
Review of derivative trading norms: SEBI has formed a working group to review the existing derivative trading norms comprehensively and recommend measures to enhance investor protection and risk management.
Additional information:
The Reserve Bank of India (RBI) has also expressed concerns about the rapid rise in derivative trading volumes and the potential challenges it poses for investors and markets.
SEBI and RBI are closely monitoring the developments in the derivatives market and are working together to address the emerging risks.
SEBI’s stance on rising risks from derivative trading is one of caution and vigilance. The regulator is taking proactive measures to address the concerns and protect investors while ensuring the continued development of the derivatives market.