The Securities and Exchange Board of India has been constantly working towards making retail investors safer in the stock market. And the recent news that it is proposing to raise the minimum contract size for trading in equity derivatives from the existing Rs 2 lakh to Rs 5 lakh and eventually to Rs 10 lakh is good for them.
This is the first time since the introduction of derivatives trading that the limit for the minimum contract size may be tinkered with. Sebi had earlier done away with the mini futures and options contracts to discourage small investors from entering the derivatives segment.
Derivatives is a hedging tool. For instance, an investor with position in cash segment can minimize either market risk or price risk of the underlying stock by taking reverse position in an appropriate futures contract. It is also a leveraging tool which allows one to take a large position with less capital. For example, one can take position by paying 10-20 per cent initial margin.
Will the increase in contract size benefit investors? According to sector observers, the move may be an indirect way of telling investors that they need to be extra careful while trading in this segment. "Derivatives is a leveraged, high-risk segment. This is a good way of keeping out investors who do not have the capability or the risk-taking capacity to dabble in the segment," said Arun Kejriwal, an investment analyst.
Notably, in 2012, the market regulator had raised the limit for investment in portfolio management services (PMS) from Rs 5 lakh to Rs 25 lakh. The aim was to keep out small investors from the PMS segment as it was not as tightly regulated as the mutual fund industry. Similarly, the regulator also prescribed a minimum lot size of between Rs 1 lakh and Rs 2 lakh for investment in SME stocks to dissuade uninformed investors from entering.
For all its good intentions, the increase in contract size could spell bad news for savvy retail investors. According to estimates, 95 per cent of investors in the F&O segment are retail investors and of this, 80 per cent have a portfolio of less than Rs 10 lakh. "These people will be deprived from hedging their portfolio," said Siddarth Bhamre, head - equity derivatives at Angel Broking. Investors today can hedge their portfolio against a fall in the market by buying put options or selling out of money call options, he adds.
The increase in contract size will jack up costs which, in turn, could impact liquidity. Let's take an example to understand this. For buying a Rs 2 lakh futures contract at a 10 per cent margin, the investor has to pay Rs 20,000 today. Depending on whether the contract size is increased to Rs 5 lakh or Rs 10 lakh, the investor will have to pay Rs 50,000 or Rs 1 lakh upfront. In options, if you are paying a premium of Rs 5 for a lot size of 500, you pay Rs 2,500 today. Going forward, the investor will have to shell out Rs 5,000 or Rs 12,500 based on the new contract size.
"The liquidity will suffer, particularly if the minimum contract value is increased five times to Rs 10 lakh. Also, since the investors will have to pay more, the chances of losing more money are also higher," said Kamath.
Experts believe that despite the new restrictions, retail investors might figure out a way to beat the system. For example, there might be an increase in off market trades or informal arrangements between investors and brokers. "The broker may trade in the investor's name, and then informally settle the gains or loss, off market with the investor," said Kejriwal.
No comments:
Post a Comment