The Hindu Business Line : SEBI move to alter derivative contract norms

THE Securities and Exchange Board of India has specified that a derivative contract should have a minimum value of Rs 2 lakh at the time of its introduction to the market.

For stock based derivative contracts, the lot size would be in multiples of 100, specified a SEBI circular. For derivative contracts that have a contract value of Rs 4 lakh and above, the lot size would be reduced to half the value of the existing lot size. Similarly, for derivative contracts that have a contract size of Rs 8 lakh and above, the lot size would be reduced to one-fourth of the existing size.

Liquidity is expected to increase substantially because of this regulation, as margins per deal will drop significantly. However, brokers are divided in their opinion about the impact this will have on the futures and options market. "The move is positive. Contract values of a lot of stocks have moved up to very high levels recently. The minimum value clause makes it within the reach of small and medium level investors," said Mr Sandeep Tandon, Refco Sify Securities.

"SEBI has been contemplating on this for a while. Market expectation was for minimum value of Rs 1 lakh, but probably because of the rising markets over the last four months, the value was raised to Rs 2 lakh," said Mr Mukul Pal, Edelweiss Capital.

"Retail investors are being lured into the futures and options markets by this move. The level of awareness of how the derivatives market works is very low and this would result in small investors losing large amounts of money," says Mr Mitesh Shah of SS Securities, a retail broking house.

Brokers feel that in the long term, lot sizes should also be fixed. "Globally lots are fixed at 100. This should be implemented in Indian capital markets also, not just for parity with international standards, but also to ensure fair play and higher retail participation," says Mr Tandon.

The stock exchanges have been asked to give a notice of at least two weeks to the market before effecting these changes. Further, for the purpose of revising the contract size, the value would be determined on the basis of the closing prices of the underlying on the day prior to the beginning of the notice period. Market rumours indicate that the new system would come into effect from April 1, 2004, though SEBI has not specified a date for implementation.