According to the Sebi Chairperson, the market regulator will consider removing derivative goods from circulation if the expert group considering the F&O industry suggests it. She went on to say that the market ecosystem is aware of that regulatory risk.
The Chairperson of Sebi Madhabi Puri Buch said, "Not at all," to a question from Moneycontrol on whether Sebi would perceive any move that would result in a contraction in trading turnover as a backward step.
Earlier in the discussion, Buch had addressed the regulator's concerns on the F&O business, including the type of trading that was seen in the segment, at a news conference that followed the Securities and Exchange Board of India's (Sebi) meeting with its Board.
Buch stated that the sole reason for Sebi's observation of concentrated trading in weekly options and on expiry day was speculation, not hedging.
She even highlighted anecdotal evidence of people losing their homes as a result. "The question is what needs to be done for investor protection, particularly since we have heard of people borrowing money for this speculative activity," she said.
In this particular situation, Moneycontrol enquired as to whether the regulator would be prepared to shelve derivative products if doing so was encouraging this trading behavior. Buch responded that if the evidence and reasoning supported such course of action, there would be no reluctance in taking it.
She said, "If that is what is required (taking out products), that is the considered view of the expert committee (which has been formed under the Secondary Market Advisory Committee) and we agree with the logic, then why not?"
"Yes of course (there will be financial implications)... (but) as you know, in any business model there is regulatory risk," she responded when asked about the financial effects on stock exchanges and other capital-market linked organizations. If you ask bankers and pharmaceutical companies what regulatory risk is, they will tell you that it is a fact of business and that investors need to be aware of it."
Buch stated that the market ecosystem has reached a "very mature" level of understanding, which allows for the acceptance of such risks. She gave the example of a well-known broker discussing this and acknowledging that their business model is impacted by regulatory changes.
In April 2024, Nithin Kamath, the creator of Zerodha, warned about regulatory risk following the RBI's clear restriction on the use of unhedged currency derivatives. He stated: "I have said this before, regulatory risk is by far the biggest risk for stock brokers"
Buch might have made reference to this incident.
She emphasized further that regulatory risk is a component of business not only in India but globally and that it affects all industries, not just the capital market. "Wherever there is regulation, there is regulatory risk," she stated.
