SEBI’s Revised Eligibility Criteria for Entry and Exit of Stocks in the Derivatives Segment

The Securities and Exchange Board of India (SEBI) has recently revised the eligibility criteria for stocks entering and exiting the derivatives segment. This move aims to enhance market integrity, reduce volatility, and ensure only quality stocks participate in the derivatives market. Below, we explore the key changes and their implications.

1. Background of the Revisions

Derivatives markets play a critical role in price discovery and enhancing market liquidity. However, without sufficient market depth and appropriate controls, these markets can become prone to manipulation and increased volatility, potentially compromising investor protection. To address these concerns, SEBI has updated the eligibility norms for stocks entering and exiting the derivatives segment, revising the criteria set in 2018.

2. New Entry Criteria for Stocks in the Derivatives Segment

SEBI has outlined that only stocks with substantial performance in the underlying cash market over a continuous period of six months will qualify for entry into the derivatives segment. The updated norms are as follows:

• Average Daily Market Capitalization and Traded Value: The stock must be among the top 500 stocks, maintaining the same criteria as before.
• Median Quarter Sigma Order Size (MQSOS): Increased from Rs 25 lakhs to Rs 75 lakhs, reflecting the tripling of average market turnover since the last review.
• Market Wide Position Limit (MWPL): Raised from Rs 500 crores to Rs 1,500 crores due to the near threefold increase in market capitalization.
• Average Daily Delivery Value (ADDV): Elevated from Rs 10 crores to Rs 35 crores, acknowledging the rise in daily delivery values.

These adjustments ensure that only high-quality stocks with sufficient market liquidity can trade in the derivatives segment, safeguarding the market from undue volatility and risks.

3. Exit Criteria for Stocks

SEBI has also tightened the exit criteria for stocks that fail to maintain the required standards:

• Performance-Based Exit: Stocks failing to meet any of the revised criteria for three consecutive months, based on rolling data for the previous six months, will exit the derivatives segment. Stocks must complete a six-month gestation period before being subject to these exit norms.
• Product Success Framework (PSF) for Single Stock Derivatives: New exit criteria align with the existing PSF for index derivatives. Key PSF parameters include trading participation, trading days, daily turnover, and notional open interest. Stocks that fail to meet these benchmarks for three months will exit, with existing contracts allowed to trade until expiry.
• Re-entry Restrictions: Once excluded, stocks are barred from re-entering the derivatives segment for at least one year from their last trading day.

4. Implications for Market Participants

These revised criteria aim to foster a robust and transparent derivatives market, protecting investors from the risks associated with inadequate liquidity and market manipulation. By ensuring only stocks with strong fundamentals and liquidity are included, SEBI intends to bolster market stability and enhance investor confidence.

Conclusion

SEBI’s revised norms for stock derivatives entry and exit reflect the evolving dynamics of the Indian market. By setting higher benchmarks, SEBI aims to enhance market quality and safeguard investor interests. This strategic move not only strengthens the integrity of the derivatives market but also aligns it with global standards, paving the way for a more mature and resilient financial ecosystem.

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.