SEBI tightens entry and exit criteria for stocks in derivatives, puts F&O category on watch

SEBI on Thursday approved stricter rules for the entry and exit of individual stocks in the derivatives segment. The regulator also announced the formation of an expert group to review the Futures & Options (F&O) category.

SEBI Chief Madhabi Puri Buch stated that the committee will focus on market development, investor protection, and risk parameters. The expert group will submit its findings to the secondary market advisory committee.

The new regulations aim to ensure the continued growth of a vibrant securities market ecosystem with appropriate regulation and investor protection. The revised criteria will help weed out stocks with consistently low turnover from the F&O segment.

The review considered significant growth in market parameters, reflecting the size and liquidity of the cash market, such as market capitalisation and turnover. The last review of the eligibility criteria for stocks in the derivatives segment was conducted in 2018.

According to SEBI, the eligibility criteria for the entry or exit of stocks should be based on their performance in the underlying cash market. Stocks should be chosen from the top 500 stocks in terms of average daily market capitalisation and average daily traded value on a rolling basis.

Additionally, the stock's market-wide position limit should not be less than Rs 1,500 crore. The stock's Median Quarter-Sigma Order Size over the last six months should be Rs 75 lakh, up from the current Rs 25 lakh.

The minimum rolling average daily delivery value in the cash market over the previous six months should be Rs 35 crore, compared to the current Rs 10 crore. For a stock to exit the derivative segment, at least 15% of active traders or 200 members, whichever is lower, should have traded in the stock during the review period. The average daily turnover should be at least Rs 75 crore, and the average daily notional open interest (futures + options) should be at least Rs 500 crore for the stock under review.

The exit criteria will only apply to stocks that have been in the derivative segment for at least six months. For existing stocks in the derivatives segment, the new exit criteria based on performance will be effective three months after the issuance of the circular.