The Securities and Exchange Board of India (Sebi) is considering to launch a pilot programme for a regulated trading platform where companies can trade shares before their initial public offerings (IPO). “Can we think of an initiative on a pilot basis for a regulated venue where pre-IPO companies can choose to trade subject to certain disclosures?” the regulator’s Chairman Tuhin Kanta Pandey said.
The new platform will help in reducing grey market activity in companies unlisted shares. The grey market refers to the unofficial trading of securities even before being listed on stock exchanges. This is an unregulated market and works on demand and supply, with investors purchasing or selling shares notionally in the grey market even before they get listed.
Derivative products
The Sebi is also mulling ways to improve the tenor and maturity profiles of the derivative products, its Chairman Tuhin Kanta Pandey said on Thursday.
The proposed measures would be aimed at introducing longer-term derivative products, he said. Derivative products derive their value from underlying assets that could include stocks, commodities and currencies. Derivatives or futures and options (F&O) markets assist in better price discovery, improve market liquidity and allow investors to manage their risks better.
“We have often stated that equity derivatives play a crucial role in capital formation, but we must ensure quality and balance. We will consult with stakeholders on ways to improve, in a calibrated manner, the tenor and maturity profiles of derivative products, so that they better serve hedging and long-term investing,” Pandey said at the annual capital markets conference organised by FICCI.
Currently, most derivatives in the country have either weekly or monthly expiry. Extending the tenure would make these products suitable for hedging and long-term investing.
The derivatives segment has been an exponential surge in trading volumes, with the majority of traders incurring losses. A Sebi study released last year found that close to 93 per cent, or 9 out of 10 individual traders, in the equity F&O segment incurred losses, with aggregate loss exceeding Rs 1.8 lakh crore between FY22 and FY24. In the recent past, the markets regulator has announced a raft of reforms to strengthen the derivatives market and to restrain speculative trading.
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These measures included recalibration of contract size for equity derivatives, rationalization of weekly index derivatives products and increase in tail risk coverage on the day of options expiry.
Pandey said that SEBI’s approach in relation to equity derivatives has been thoughtful and consultative. The regulator is also looking to deepen the cash equities market, which is the true foundation of capital formation.
“Volumes in the cash market have grown rapidly, doubling in terms of daily traded volumes over a period of just three years. However, much more needs to be done,” he said.
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