'No Paytm-like contamination in markets': Sebi chief says households losing Rs 60,000 cr a year on F&O bets

SEBI Chief Madhabi Puri Buch has taken a firm stand against what she calls "Paytm-like contamination" in the markets, underscoring the regulator's commitment to maintaining the integrity of the financial system. 

In response to concerns about centralizing KYC (Know Your Customer) processes across the financial ecosystem, Buch emphasized the robustness of the current KYC Registration Agency (KRA) system. This system, regulated by SEBI, ensures that once a KYC is validated by a KRA, there is no need to repeat the process in the capital markets. 

Buch made her stand clear: individual intermediaries should not be allowed to conduct KYC due to the risk of systemic contamination, as evidenced by the issues faced by Paytm Payments Bank.

On January 31, the Reserve Bank of India imposed restrictions on Paytm Payments Bank due to multiple lapses, including irregularities in the KYC process. SEBI’s refusal to delegate KYC responsibilities to individual entities stems from a desire to prevent similar issues from spreading across the financial system. “If we allowed Paytm into our system without a KRA, it would contaminate the entire system. We cannot allow that,” Buch stated at a National Stock Exchange event. She stressed the importance of the KRA in validating transactions and preventing fraudulent activities.

Buch also highlighted the significant financial losses households face in the futures and options (F&O) segment, estimating annual losses of up to Rs 60,000 crore. This, she argued, is not just a micro-level concern but a macro-level issue with potential implications for the broader economy. “If Rs 50,000-60,000 crore a year is going away into losses in F&O whereas that would have been productively deployed as maybe the next IPO round, maybe mutual funds, to other productive purposes, why is that not a macro issue?” she asked, reiterating her concerns at the NSE event in Mumbai.

SEBI has proposed tighter regulations on derivatives to enhance market stability and protect small investors. A recent consultation paper, first reported by Moneycontrol, outlines these proposed measures. This move follows a SEBI study that revealed 90% of trades in the F&O segment result in losses. The regulator is pushing for changes to prevent such extensive losses and ensure the market functions more efficiently.

The turnover in index options has surged dramatically from Rs 4.5 lakh crore in 2018 to Rs 140 lakh crore in 2024, with overall derivatives turnover increasing from Rs 210 lakh crore to Rs 500 lakh crore during the same period. The participation of individual investors has also risen significantly, from 2% to 41%. However, a SEBI study recently found that more than 70% of individual investors in the equity cash segment incurred losses in FY23.

To further protect investors, SEBI is considering mandating large brokers to offer Application Supported by Blocked Amount (ASBA) facilities in the secondary market. This mechanism, already successful in the primary market, allows investors to block funds in their bank accounts, which are only debited upon trade confirmation. This could potentially benefit investors by Rs 2,800 crore.