Stocks like BSE, Jio Financial, Zomato, Yes Bank, CG Power, NHPC, and Ircon, among others, could soon make it to the derivatives segment if the new eligibility criteria proposed by the Securities and Exchange Board of India (SEBI) make it to the final framework for including stocks in the F&O arena.
Market participants have been quick to do their own set of analysis based on the consultation paper released by SEBI that aims to review the regulatory framework for inclusion of stocks in the equity derivatives segment.
This assumes significance as the eligibility criteria was first formulated six years ago in 2018 and since then there has been a paradigm shift in the market dynamics including huge jump in the overall size of the market and the daily turnover among other things.
Source: IIFL Alternatives research
According to domestic brokerage major IIFL, if the proposed framework is implemented, stocks like BSE, Hudco, CAMS, CG Power, Adani stocks, and Jio Financial would feature among the top contenders to join the F&O club while companies like IPCA Labs, JK Cement, CUB, and Abbott India could see their stock exit the arena.
Nuvama Institutional Equities is of the view that Zomato, Yes Bank, Jio Financial, NHPC, IRCON, and BSE would be among the top possible entrants in the F&O segment, while Abbott India, Balrampur Chini, CUB, Can Fin Homes, Atul, and Bata India would be among the top candidates for potential deletion from the F&O universe.
To be sure, the proposals are part of a consultation paper issued by SEBI on Saturday and public feedback and comments have been invited till June 19.
“This is a good review from SEBI. However, in our market, where there is not enough liquidity in most of the stock derivatives, I don't see a significant change in the volume as volumes are concentrated with around 30-40 stocks only,” said derivatives trader Santosh Pasi.
“And I'm sure those stocks will easily meet the new proposed criteria. However, the total number of stocks in the derivative segment will reduce because of enhanced requirements,” added Pasi.
Sriram Velayudhan, Vice President of IIFL Alternative Research reiterated what the capital market regulator also highlighted -- that the rationale behind seeking consultation is the considerable change in market parameters like size, cash market liquidity, market capitalisation, and turnover over the last few years.
“Although most of the criteria are quantifiable, we are seeking clarity from the concerned authorities on whether the referred figure is the average daily option premium turnover or notional option turnover. We believe it will most likely be the average daily notional option turnover, as average daily premium turnover will lead to many stocks becoming ineligible subsequently,” he added.
Key proposals to decide whether a stock can be included in the F&O segment include increasing the Market Wide Position Limit (MWPL) to a range between Rs 1,250 crore and Rs 1,750 crore, given the sharp increase in overall market capitalization compared to 2018. Currently, a stock’s MWPL on a rolling basis should be at least Rs 500 crore.
Further, it has been proposed that the stock’s Average Daily Delivery Value (ADDV) in the cash market over the previous six months on a rolling basis should be in the range of Rs 30 crore to Rs 40 crore; it is currently pegged at Rs 10 crore.
Also, the Median Quarter Sigma Order Size (MQSOS) of a stock over the last six months on a rolling basis has been proposed to be increased to a range between Rs 75 lakh and Rs 1 crore from the current Rs 25 lakh, while highlighting the fact that the average market turnover is currently around 3.5 times higher than it was in 2018.
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