SEBI tightens rules

THE tightening of rules for investors by the Securities and Exchange Board of India (SEBI) is a pragmatic move to cool the frenzy to make easy money in the derivatives market. Reports suggest that lakhs of rookie traders have ventured into the risky futures and options segment, treating it almost like an online casino. India is now the world’s largest equity derivatives market. The downside is reflected in a recent SEBI study. In nearly 93 per cent of individual options, traders incurred an average loss of Rs 2 lakh in the high risk-reward market over the last three financial years. The regulator has now increased the entry barriers and made it more expensive to trade, in a bid to dissuade retail investors from speculating on risky contracts. SEBI says the measures will safeguard small investors and enhance market stability.

A worrying aspect is that more than three-fourths of the loss-making traders are continuing their activity. The regulatory action follows multiple concerns being raised, including by the Reserve Bank of India, about mounting losses of household savings by those taking punts. The implementation of measures recommended by an expert panel is expected to deter excessive speculation, especially by those who may not have the capacity to absorb larger losses. Some of the changes are set to take effect from November 20.

The booming stock market has resulted in an increasing number of middle-class households investing their savings in equities. A survey says that most of them reside in smaller cities and are below the age of 40. The problem to contend with is that uninformed and uneducated investors are becoming prey to this retail speculative mania. SEBI’s intervention is a step in the right direction.