100-Word Take | For physical settlement in options to work, stock lending needs to be fixed

SEBI is planning mandatory physical settlement in all equity options contracts over time, to curb excessive speculation. This is already applicable to 46 stocks.

The intention is noble. Outsized trading volumes in options contracts is no reflection of a vibrant capital market. But imposing mandatory physical settlement without supporting infrastructure is no solution either.

It could even turn out to be counterproductive since many option trades have a cash market leg as well. What SEBI needs to do urgently is overhaul the stock lending and borrowing (SLB) system.

The main reason why SLB has failed to take off in more than a decade is that short sellers find the borrowing cost prohibitively expensive. Short selling through futures is much cheaper. If stocks can be borrowed at a reasonable cost, mandatory physical settlement will be more effective. And it will also help better price discovery in the cash market.