Vikram Limaye, managing director and chief executive officer of the National Stock Exchange of India, on Wednesday said derivatives were not the “weapons of mass destruction” they were made out to be. At least not in India.
This perception was based on how the derivatives markets are structured globally, where most of the transactions are ‘over the counter’. “Equity derivatives contracts in India can be traded only on recognised stock exchanges. The Securities and Exchange Board of India (Sebi) has put together a well thought-out framework for trading that mandates use of advanced statistical and risk management tools including margining and position limits. The regulator has also kept out complicated and exotic products that are provided in international markets,” Limaye said at an event commemorating 25 years of the benchmark Nifty50 index and 20 years of the exchange’s derivatives segment.
Sebi Chairman Ajay Tyagi said increased investor participation in domestic markets is an extremely encouraging sign for the growth of capital markets.
Tyagi said India had seen a significant increase in individual investors accessing the capital markets. The cumulative demat accounts, which stood at 36 million in March 2019, rose to 77 million as of the end of November 2021.
“So, in fact, what was achieved in over two decades in the market has been achieved in the last about two-and-a-half years,” said Tyagi.
“Investors on their part need to make informed investment decisions based on their risk appetite, especially in the case of derivatives.
It is critical to apprise investors how these products can be used to hedge their risks so that they do not get their fingers burned and disappointed from the capital market,” Tyagi said.
The Sebi chairman said the equity cash markets will move from T+2 to T+1 settlements in a phased manner from next month and this will reduce uncertain exposures.
Union Commerce minister Piyush Goyal, the chief guest at the function, said stock exchanges must establish a strong system to maintain transparency to encourage the common man to invest in stocks.
The daily average turnover for single stock derivatives increased 5.4 times to Rs 89,487 crore during the same period. The same stocks in the underlying cash market saw an increase of 5.5 times in daily average turnover to Rs 51,775 crore.
Nifty50 has delivered annualised returns of 15.2 per cent in the last 10 years and 16.8 per cent in the last 20 years (total index returns as on December 28, 2021). The introduction of the index acted as a precursor to the introduction of equity index derivatives introduced on June 12, 2000. This was followed by the introduction of index options, stock options and stock futures the next year.
Nifty50 now has a virtual monopoly in the index derivatives segment, accounting for over 95 per cent of the total value.
“Nifty has come a long way to evolve as a flagship equity index. Today, the Nifty50 represents 66 per cent of the float adjusted market capitalisation and is seen as a reliable barometer of the Indian equity market,” said Dinesh Kumar Khara, chairman, State Bank of India.
“The index represents almost 80 per cent of the Indian market cap and most of the money managers like ourself as well as international ones look at Nifty50 as a benchmark while measuring the performance of their own schemes,” added A Balasubramanian, MD and CEO, Aditya Birla Sun Life AMC.
“The exchange has made a lot of innovations and value-add in the kind of products they have developed over the years. It is not easy to manage such large derivatives volumes and trades, especially from a risk management and compliance standpoint, and the exchange has done remarkably well in this area,” said Siddarth Bhamre, director — alternative investments and research, InCred Capital.
Limaye, for his part, says the need of the hour is to broad-base investor participation in equity derivatives, especially from insurance companies and banks.
