Exclusive: Mutual Funds bat for inclusion of more stocks in F&O and rejig in MCap formula

As a measure to enhance liquidity in the market, various mutual fund houses have suggested to the regulator Securities and Exchange Board of India (SEBI) for inclusion of more stocks in the Future and Options segment. As per sources aware of the matter, the issue was suggested by some big mutual funds as a measure to increase liquidity in the market. The issue was discussed with SEBI in a recently held meeting. One fund manager on the condition of anonymity suggested that keeping the number of listed companies at least 300-350 stocks should be included for the derivatives segment.  

The issue came up for discussion during the review meeting of the stress test for small and mid-cap schemes of mutual funds with SEBI. As per sources, there is no affirmation on the proposal from SEBI yet. Fund houses were of the view that while the number of listed companies has increased in the last few years the number of stocks in the F&O segment has reduced. 

SEBI had floated the idea of tightening entry norms for stocks for inclusion in the Future and Options segment in July 2022. The issue was discussed with a SEBI committee. Back then, the proposed criteria included doubling market market-wide position limit for entry for F&O to Rs 1000 crore, against Rs 500 crore. Also, the average daily turnover criteria suggested was Rs 20 crore, instead of the prevailing Rs 10 crore. An enhancement in quarterly sigma size was also suggested from Rs 25 lakhs to Rs 50 lakhs. The proposal was cleared then by the SEBI committee at that time there was no major objection to the proposal. The issue was discussed with exchanges, depositories, broker associations, and other stakeholders. 

Stocks for F&O are chosen from amongst the top 500 stocks in terms of average daily market capitalization and average daily traded value in the previous six months on a rolling basis. The average daily market capitalization and the average daily traded value are computed on the 16th of each month, on a rolling basis, to arrive at the list of top 500 securities. 

The market participants believe that if all the suggested criteria were applied, at least 25 per cent of stocks in F&O would be out. Currently, there are 183 stocks in NSE Future & Options segment available for trading.

The proposal was then taken for further internal discussion within SEBI, and the regulator is still testing the entry criteria for different scenarios. The view within SEBI has been that F&O is mainly used for speculative trades rather than for real hedging purposes against the cash segment, especially the options segment.  

Besides increasing the list of stock derivatives, fund managers also suggested for increasing the number of stocks for large, mid-cap, and small-cap segments. As per sources, the fund managers suggested for increasing the large-cap definition by at least 25 stocks, from the current top 100 stocks to 125 stocks. Similarly, for mid-cap the list should be extended further from 126-275 for small caps companies beyond 276 should be part of small caps. Currently top 100 companies are considered as large caps, then market cap-wise wise next 101-250 are mid-caps, and companies beyond 250 are counted as small caps.   

Fund managers are of the view that regulations, specially those related to market capitalization criteria, should be dynamic and reviewed periodically as the market has changed a lot in the last few years. SEBI is yet to form an opinion on the said proposal. Sources suggested that SEBI will first evaluate all the proposals based on available data and only then take any view. 

Fund managers are also of the view that at least 6 months should be given for rebalancing and adjustment, during times of high volatility stocks keep changing the market cap criteria so the funds have to make a switch. Currently, 90 days are given for the re-balancing of the portfolio. 

SEBI did not respond to queries sent by Zee Business.