Analyzing IBULLHSGFIN’s Exclusion from the F&O Segment: Insights into the December 29 Transition

Derivatives are financial instruments whose value is derived from an underlying asset, which could be a stock, an index, an interest rate, or a currency. In India’s stock exchange segment, there are two primary markets: the cash market, where shares are bought and sold at their current market prices, and the F&O (Futures and Options) market.

Recently this circular was posted on NSE website:

A recent circular posted on the NSE website, guided by SEBI Circular elaborated on the exclusion of futures and options contracts on IBULHSGFIN (Indiabulls Housing Finance Limited). However, the precise reason for this decision is undisclosed. Such exclusions typically occur due to factors such as inadequate liquidity, regulatory concerns, shifts in company fundamentals, unfavourable market conditions, non-compliance with eligibility criteria, and risk management considerations.

Selection Criteria 

Before comprehending why IBULHSGFIN was removed from the F&O segment, it is imperative to grasp how securities are initially included. Futures & Options contracts may be introduced on new securities which meet the below mentioned eligibility criteria, subject to approval by SEBI. Selection criteria entail a comprehensive evaluation of factors:

1. The stock shall be chosen from amongst the top 500 stocks in terms of average daily market capitalisation and average daily traded value in the previous six months on a rolling basis.
2. The stock’s median quarter-sigma order size over the last six months shall be not less than Rs 25 lakhs. For this purpose, a stock’s quarter-sigma order size shall mean the order size (in value terms) required to cause a change in the stock price equal to one-quarter of a standard deviation.
3. The market wide position limit in the stock shall not be less than Rs 500 crores on a rolling basis. The market wide position limit (number of shares) shall be valued taking the closing prices of stocks in the underlying cash market on the date of expiry of contract in the month. The market wide position limit of open position (in terms of the number of underlying stock) on futures and option contracts on a particular underlying stock shall be 20% of the number of shares held by non-promoters in the relevant underlying security i.e., free-float holding.
4. The Average daily delivery value in cash market shall not be less than Rs 10 crores in the previous six months on a rolling basis. The Average Daily Deliverable Value shall be computed taking Deliverable quantity as per client level as computed by NSE Clearing Limited daily and close price of the trade date.
5. If an existing security fails to meet aforesaid continued eligibility criteria for three months consecutively, then no fresh month contract shall be issued on that security. However, the existing unexpired contracts may be permitted to trade till expiry and new strikes may also be introduced in the existing contract months.
6. Further, the members may also refer to circular no. NSCC/F&O/C&S/365 dated August 26, 2004, issued by NSE Clearing regarding Market Wide Position Limit, wherein it is clarified that a stock which has remained subject to a ban on new position for a significant part of the month consistently for three months, shall be phased out from trading in the F&O segment.
7. The number of eligible securities may vary from month to month depending upon the changes in average daily market capitalisation, average daily traded value, quarter sigma order sizes and average daily deliverable value calculated every month on a rolling basis for the past six months and the market wide position limit in that security.

Importantly, these criteria must be met continuously for six months. The NSE regularly monitors and adds new stocks to the F&O segment, reflecting changes in market conditions and performance.

Exclusion 

Stocks are excluded from the F&O segment when they no longer meet these above criteria, signalling a loss of liquidity in the Exchange’s view.

It’s important to note that exclusion from the F&O segment is different from a temporary F&O ban, which lasts only a few days. To have a chance of re-entry, a stock excluded from the F&O space must meet the eligibility criteria for six consecutive months. This practice is primarily in the interest of investors and transparency, ensuring that stocks in the F&O segment meet specific standards.

What’s Next?

The National Stock Exchange (NSE) recently made the decision to remove Firstsource Solutions and Torrent Power from its futures & options (F&O) segment, rendering them unavailable for trading in the F&O segment starting from the April series onwards. Despite this exclusion, both stocks have demonstrated remarkable performance. Torrent Pharma’s share price rose from Rs 510.4 on March 31, 2023 (pre-exclusion) to Rs 730.30 as of October 18, 2023, marking a substantial 43% gain. Similarly, Firstsource Solutions saw an impressive surge from Rs 105.5 to Rs 166.5, climbing more than 57% gains during the same period, showcasing resilience and robust market performance.

Re-introduction of excluded stocks 

A stock which is excluded from derivatives trading may become eligible once again. In such instances, the stock is required to fulfil the enhanced eligibility criteria for six consecutive months to be re-introduced for derivatives trading.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.