By reducing risk, derivatives have the potential to deepen the capital markets, while at the same time moremoney, especially foreign money, should now be attracted into equities. This will ultimately help corporates to raise equity at a cheaper price, while it will also aid treasurers to take offsetting positions against equity exposures. But as a string of well-publicised disasters all over the world have shown, derivatives bring in their wake a whole lot of new risks. Some of these have been taken care of by the Sebi stipulations on outstanding exposure, minimum contract value, minimum net worth etc. But that leaves out of the pale issues regarding disclosure norms about the exposure of companies to derivative instruments, exposures which, if not well-understood, can easily bankrupt companies.

Stringent disclosure norms need to be framed for corporates, showing the exposure to derivative instruments. Nor should a mere reference in the annual report be deemed sufficient for the purpose. Stock prices being as volatile as they are, exposures need to be monitored on a quarterly basis.

Sebi would do well toreview the disclosure rules in this regard. The Reserve Bank of India would also need to think through its position on allowing banks to take part in the new business. Given its status as a hedge, there is no reason why banks as well as finance companies should not also benefit from derivatives. However, risk weightages for capital adequacy need to be put in place, and transparency insisted upon. In short, while it is impossible to prevent gamblers from treating derivatives as just another avenue for a fling, regulation must ensure that the financial system remains unaffected by their actions.