MUMBAI, March 16: The battle for the introduction of derivatives trading in the country has taken a fresh twist with Sebi keen on restricting derivatives trading to institutional investors. This, market sources say, will "kill" the derivatives segment even before it takes off.Although Sebi has not yet taken a final decision on the matter, sources say that the market watchdog is considering going against the recommendation of the LC Gupta committee to allow derivatives for all segments of the market, and instead, may restrict it only to institutions.
"Although we have not taken a final view yet, we believe that like in the case of Taipei, India too could do well to start derivatives trading initially for institutions only," said a top Sebi source. This move has taken the pro-derivatives lobby in the country by complete surprise as they were under the opinion that the stage is set for introduction of derivatives trading following the completion of the Gupta committee report.
"Taipei is not the world. Wemust not forget that 95 per cent of the volumes in the Indian equity markets are attributed to non-institutional investors.
About 80 per cent of the delivery-based trades are carried out by individuals with the institutional share being only 20 per cent. If they keep individuals out of derivatives there would be virtually no volumes in the segment which in effect would kill derivatives trading in India," said a pro-derivatives lobbyist.
"Derivatives are a hedging mechanism which can play the role of market insurance. How can you deprive the majority of the market from this instrument and allow a small minority to reap the benefits of it," said the source. The pro-derivatives lobby feels that few brokers would come forward to take membership of the derivatives segment of an exchange if the rules permit them to trade only on behalf of institutions. "Just imagine a case if the cash market was left only to institutional investors.
Most of the brokers would have closed shop and gone out of business. How dothey expect brokers today they are going to have a highly truncated clientele," said the source. "Derivatives are tools complementary to the equity products. In India, since the market is not largely institutionalised, there is no way in which you can succeed with this instrument if you keep the majority of investors out of its purview," said a pro-derivatives lobbyist.
The anti-derivatives lobby has voiced concern over the introduction of derivatives in India on the grounds that it is very risky and the Indian markets are not yet ready for their introduction. The LC Gupta panel has on its part, after a year-and-a-half-long debate on the subject, concluded that derivatives can be introduced in India after putting in place risk containment measures.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
