SEBI Apprehensive Of Derivatives Frenzy; Suggests Steps To Deepen Equity Market

SEBI Apprehensive Of Derivatives Frenzy; Suggests Steps To Deepen Equity Market

The concerns were discussed during the 11th Capital Markets Conclave organized by the Confederation of Indian Industry

The Securities and Exchange Board of India (SEBI) has expressed concern over the growing dominance of ultra-short-term derivatives trading. It cautioned that such trends could undermine India's capital markets and suggested steps to extend the tenure and maturity of the products.

While addressing the 11th Capital Markets Conclave organised by the Confederation of Indian Industry (CII), Ananth Narayan, SEBI’s Whole-Time Member, stated, "Very short-term derivatives continue to dominate equity derivative volumes, especially expiry-day index options. This is an imbalance that is obviously unhealthy and may have potential for adverse consequences.”

He added, "I would strongly endorse that we must look for ways to further deepen our cash equities markets, even as we look to improve the quality of our derivatives market by extending the tenure and maturity of the products and solutions on offer. For this, we need constructive engagement from all stakeholders.”

While pointing towards SEBI’s research, Narayan said that 91 percent of individual traders in futures and options (F&O) incurred net losses in FY 2025. Collectively, they lost over Rs.1 lakh crore in funds that could have contributed to responsible investing and capital formation.

He highlighted that the Indian derivatives market was unique, with expiry-day index option turnover often exceeding the cash market by as much as 350 times. "Unlike longer-term derivatives, these short-term products contribute little to capital formation and may add to market volatility.”

The CII official acknowledged that exchanges, brokers and intermediaries had significant revenue dependence on such trading volumes. But, "Is all this at all sustainable?" he questioned.

Meanwhile, in October 2024 and May 2025, SEBI introduced regulatory measures to curb excesses in the space, which Narayan said were showing early signs of moderation. He emphasised the need for continuous engagement with stakeholders to ensure the protection of capital formation and market health.

Expecting industry collaboration, he stated, "We must look for ways to deepen our cash equities markets while improving the quality of derivatives through longer-tenure products.”

He underscored the advantages of listing, particularly in the current environment where valuations are highly attractive. Narayan further stated that going public could unlock substantial value and enable companies to raise capital in a meaningful manner and act as a force multiplier for achieving scale and growth.

Meanwhile, the regulatory authority is working to boost participation and innovation across asset classes by enhancing transparency in corporate bonds, InvITs, REITs, municipal bonds, and expanding commodity derivatives. It has sought support from the stakeholders.

Stressing that preserving trust was the key ingredient for healthy capital markets, Narayan continued, "Our funds ecosystem has grown significantly in both issuances and investments. Something good is underway around capital formation.”

However, the official warned that unchecked speculation, governance failures, technology lapses, market manipulation, or flawed market design (Type I errors) could destroy investor trust. He also cautioned against over-regulation (Type II errors) that may stifle legitimate business or capital formation.

He urged exchanges, clearing corporations, and depositories to maintain strong operational resilience and risk management while balancing commercial interests with public trust. And called upon intermediaries and industry players to act as trusted advisors.

"When you see something wrong, please say something. And when you seek regulatory relief, please engage with us openly on how risks of potential Type I errors will be mitigated," he encouraged.

The CII member also emphasised that compliance with disclosure and governance standards associated with being a listed entity enhances long-term sustainability. And compared transparency to ‘sunlight’ and being the ‘best disinfectant.’

Hoping to see more micro, small, and medium enterprises (MSMEs) listed and grow into large national champions, he reiterated that the choice ultimately rested with promoters.

Speaking on the occasion, Nilesh Shah, Managing Director, Kotak AMC, remarked that with a four percent capital-output ratio, India could double its growth towards Viksit Bharat.

He further stressed that capital was not a constraint amid rising household and Foreign Direct Investment (FDI) and the country required financial literacy to unlock domestic capital potential.

Ankit Sharma, Chief Regulatory Officer-Listing and Investor Compliance at the National Stock Exchange (NSE), emphasized SEBI’s role in channelling funds to high-growth sectors and addressing SME financing gaps. He stressed that with India's markets now the fourth-largest globally, greater inclusion of MSMEs, particularly from eastern India, would ensure balanced growth.