As India cements its position as the global leader in derivatives trading, the markets regulator is tightening oversight to curb speculative excesses, warning that unchecked enthusiasm in futures & options (F&O) could drain retail savings and disrupt the financial ecosystem.
Ashwani Bhatia, whole-time member of the Securities and Exchange Board of India (Sebi), sounded a sharp warning on the risks retail investors are taking in their chase for quick profits. He cautioned against turning F&O trading into a national pastime, likening the trend to a ticking time bomb.
“We are number one and globally, also more than 50% of the F&O volume happens in India. F&O cannot be and should not be a national pastime”, Bhatia said at the Morningstar Investment Conference 2024.
Bhatia pulled no punches in highlighting the dangers retail participants face in the booming derivatives market. "Your odds are terrible,” he said.
In the last three years, retail investors have incurred losses totalling ₹1.8 trillion, with 93% of participants losing money. Meanwhile, just 1% of traders capture 99% of the profits, he highlighted, underscoring how institutional players reap the lion’s share.
Bhatia urged investors to focus on “serious investing” and actively participate in the country’s wealth creation. "Wealth is being created very fast. Investors should participate in the wealth creation that is happening in the country”, he said.
To curb the growing exuberance, Sebi implemented six of the seven recommendations by an expert panel earlier this month. These measures aim to cool the overheated derivatives market, with a key focus on better disclosures. Brokers are now required to explicitly inform retail participants about potential losses, ensuring transparency around F&O risks.
Bhatia advised new investors to avoid speculative trading entirely, saying that first-time investors should steer clear of F&O. "A good way would obviously be prudent investing through pooled accounts like mutual funds and direct investing,” he added.
Bhatia reiterated Sebi's concerns about questionable practices in the country's small and medium enterprise (SME) market and cautioned against the irrational retail frenzy surrounding SME IPOs.
"What we have seen is pretty disturbing! The way retail participation is happening, the number of times IPO issues are oversubscribed, the way market making happens, the way underwriting happens and obviously we do not feel very comfortable about what is going on” Bhatia said.
He referenced recent regulatory actions, including the Trafiksol case, which brought to light the potential misuse of SME IPOs for price manipulation. While Sebi had designed the SME listing framework to facilitate capital access for small businesses driving employment, innovation, and exports, Bhatia warned that the current dynamics undermine its original intent. “Some of the things that we have seen do not give us much confidence,” he remarked.
Bhatia said Sebi is preparing a discussion paper to address these issues, with plans to release it by the end of the month.
Since the 2012 launch of the SME platform on the stock exchanges, the market has seen significant growth, with over ₹14,000 crore raised in the past decade, including approximately ₹6,000 crore in 2023-24, according to an August Sebi advisory note.
