Reining in the F&O beast: How can policymakers make it safer?

Of late, there has been a lot of talk about how millions of new investors are entering India’s stock markets. As many as 122 million demat accounts have been opened since April 2020 alone, out of a total of 158 million till May 2024. On the face of it, that’s good news. However, bolstered by the rising stock indices that are regularly hitting new highs, a large number of retail investors are making a beeline for the Futures & Options (F&O) segment, a part of the market that is known for high risk and complicated products, especially index options. These retail investors are egged on by discount brokerages that offer zero brokerage fees and lending facilities. The new generation of investors has a higher appetite for risk. Besides, there’s easily available research and the presence of a number of influencers pushing options strategies through digital channels. Such is the rush for the F&O segment that it now has market regulator Sebi and even the government worried that the urge to speculate could lead to household savings being routed to speculative ends and cause a macro risk. Even Finance Minister Nirmala Sitharaman has pointed to this imminent risk and nudged investors by raising taxes on F&O trades in the Budget.

In our cover story, Anand Adhikari does a deep dive into the problems and risks in the F&O segment and what policymakers could do to make it safer. While F&O as a hedging tool is necessary for the markets, unsuspecting and inadequately informed retail investors do run the risk of being singed by these high-risk instruments. Sebi figures show retail investors have lost a massive `52,000 crore in F&O activity in FY24 alone. While the FM has warned that an unchecked explosion in F&O can cause challenges for the market and household finances, National Stock Exchange MD & CEO Ashishkumar Chauhan has publicly stated that retail investors should avoid derivatives trading owing to the high risk associated with the segment. The problem is, very few are listening to these warnings as the markets move up and greed takes over. Besides, a hard clampdown could also impact the government’s tax revenues by as much as `60,000 crore. Much like the Hobson’s choice policymakers face with the cigarette industry, there’s a dilemma in F&O too. How much regulation is too much? Will too much regulation stifle the markets? Sebi will need to strike a balance while dealing with this problem.

Talking of Sebi, we also bring you a report on the latest salvo fired by American short-seller Hindenburg Research, which had recently been show-caused by India’s market regulator. In response to this, Hindenburg—which caused a $150-billion rout in Adani Group stocks when it put out its first report in January 2023—released another damning report, this time targeting Sebi Chairperson Madhabi Puri Buch, alleging conflict of interest in conducting the probe on Adani stocks. Buch and Sebi have rubbished the charges, but the Opposition parties are in no mood to let this rest. Hindenburg 2.0 has started a new fire that may not be doused that easily.