Capital markets regulator Sebi on Monday proposed stricter norms for the entry of individual stocks in the derivatives segment.

The new proposal would weed out stocks with consistently low turnover from the Futures & Option (F&O) segment of the bourses.

"Without sufficient depth in the underlying cash market and appropriate position limits around leveraged derivatives, there can be higher risks of market manipulation, increased volatility, and compromised investor protection," Sebi said in its consultation paper.

Given all this, there is a need for Sebi to ensure that only high-quality stocks in terms of size, liquidity, and market depth are available in the derivatives segment.

In line with this, the extant market parameters for eligibility in the derivatives segment need to be readjusted to keep pace with the evolving market conditions, it added.

The review has been proposed considering remarkable growth in market parameters reflecting the size and liquidity of the cash market such as market capitalization and turnover. The last review of the eligibility criteria for the introduction of stocks in the derivatives segment was conducted in 2018.

Under the proposal, for an individual stock to be included for derivative trading, it should have traded for 75 per cent of trading days.

Further, at least 15 per cent of active traders or 200 members, whichever is low, should have traded in the stock, average daily turnover should be between Rs 500 crore and Rs 1,500 crore and average premium daily turnover should be at least Rs 150 crore for the inclusion.

In addition, Sebi proposed that the maximum number of open contracts allowed for the underlying stock should be Rs 1,250 crore and Rs 1,750 crore. At present, the figure is pegged at Rs 500 crore.

These proposals are aimed at ensuring that stocks have sufficient turnover, open interest and widespread participation.

Sebi said that stock should continue to be chosen from amongst the top 500 stocks in terms of average daily market capitalisation and average daily traded value on a rolling basis.

The stock's Median Quarter-Sigma Order Size over the last six months should be between Rs 75 and Rs 100 lakh. This figure has been hiked 3-4 times from a minimum of Rs 25 lakh at present.

The stock’s minimum rolling average daily delivery value in the cash market in the previous six months should be Rs 30-40 crore. Currently, this is Rs 10 crore.

If a stock fails to meet the criteria for three months consecutively, then such stock should exit from the derivatives segment. It means no new contract would be issued on that stock.

The Securities and Exchange Board of India (Sebi) has sought public comments till June 19 on the proposal.

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