SEBI increases minimum contract size of equity derivatives segment to 5 Lakh

The market regulator Securities and Exchange Board of India (SEBI), has increased the minimum contract size in the equity derivatives segment to Rs 5 lakh, which is at present Rs 2 lakh. This step has taken safeguard major interest of retail investors in this high-risk segment and to regulate the securities market, with the same intention the SEBI had discontinued mini derivative contracts on the Index (Sensex and Nifty) in November 2012.

The new provisions would be applicable from the next trading day after the expiry of all October 2015 contracts in other words it is applicable from the November 2015 contracts. As per the circular dated 13th July 2015, the lot size for equity derivative contracts shall be fixed in such a way that the contract value of the derivative on the day of review is within Rs 5 lakhs and Rs 10 lakhs. As a result the lot sizes of many stocks will increase. For example, the ACC whose current market lot is 125 may go up to 300.

The SEBI also added that the lot size shall be fixed as a multiple of 25, but if the contract value of the stock derivatives at the minimum lot size of 50 is greater than Rs 10 lakhs, in that case the lot size shall be fixed as a multiple of 5, provided the lot size is not less than 10. And in case of index derivatives, the lot size shall be fixed as a multiple of 5, provided the lot size is not less than 10.

The SEBI asked the stock exchanges to review the lot size once in every 6 months and exchanges shall have to give an advance notice of at least two weeks to the market, before any revision of lot size. If the revised lot size is higher than the present one, it will be effective for only new contracts. In case of corporate action, the revision in lot size of existing contracts shall be carried out as per the SEBI circular.

The move of the SEBI will reduce the liquidity in the derivative segment, as the retail investors contribute sizeable volume but, it will help present retail investors, who will enter the derivative segment without ascertaining their risk capabilities and ultimately lose money on most of the times. On the other hand there will be an increase in the volumes of cash segment, as most of the retail investors will come back to cash segment.