BSE Ltd stock is down about 20% since closing at ₹5,609 on 24 February, owing to a new consultation paper from markets regulator Sebi later that day.
The fear is clear: trading volumes may drop further if Sebi’s recommendations are implemented. Still, the sharp fall in the stock suggests the Street may be overreacting. A deep dive into Sebi’s paper indicates that the actual impact of the recommendations could indeed be small.
The consultation paper is divided into two parts. The Street seems to be more concerned about the first part, or part A, which deals with index derivatives, a popular trading instrument.
Calculating open interest
Currently, calculating open interest is based on notional value (the total monetary value of contracts), and Sebi recommends shifting to a delta-based future equivalent calculation.
Also read: Dalmia Bharat has a lot of ground to cover to achieve a pan-India presence
For most investors, there’s no need to grapple with terms such as ‘notional value’ and ‘delta based future equivalent open interest’. All one needs to understand is the impact on the stock market’s derivative volumes if the proposed norms – i.e. a net future equivalent limit of ₹500 crore for each entity – were in force in November.
Sebi’s own study shows that in 89% of instances, it was within the limit in November. This means the limit was exceeded in just 11% of instances, which means fears of the impact on trading volumes are exaggerated. So why is Sebi proposing the change? Because in the rare instance in which the notional value exceeds ₹10,000 crore, it could create systemic risk.
Derivatives on non-benchmark indices
The impact of part B is easier to understand. The key point here is about establishing eligibility criteria for derivatives on non-benchmark indices (those other than Nifty 50 and Sensex).
A popular non-benchmark index is Nifty Bank. It is a concentrated index with 12 constituents, and HDFC Bank’s weight is 33%. Currently, big players (like foreign institutional investors) can manipulate the price of the stock that has the highest weightage in the index based on their futures & options (F&O) positions in the index.
Also read | Manufacturing PMI: Q4 is a litmus test, but no fireworks so far
Sebi has proposed rules to check any such manipulation. Under its recommendations, derivative contracts will be offered only on broad-based indices with at least 14 constituents, with the weight of the top member capped at 20% and the top three at 45%.
Remember, even BSE Bankex has a concentration problem. Does this mean derivative contracts based on these indexes will be discontinued? That may not be required as NSE and BSE could make small tweaks to ensure compliance with the new norms. These tweaks include increasing the number of constituents and capping the maximum weight of an individual stock. Hence, this proposal is unlikely to have a significant impact.
Single-stock derivatives
Also, in single-stock derivatives, Sebi proposes to curtail the position limit at 15% of the free-float market capitalisation of a stock or 60 times the average daily delivery value, whichever is lower. These figures are currently 20% or 30 times. As one parameter has been increased from 30x to 60x and the other reduced from 20% to 15%, it is hard to predict the impact of this step. In any case, this should affect only a few stocks with relatively low liquidity in F&O.
After four consecutive days of losses, BSE Ltd stock gained 2% on Tuesday. The Street seems to have noted that the price-to-earnings multiple of 40x – based on a Bloomberg consensus of BSE’s standalone earnings estimates for FY26 – isn’t steep given the service nature of the business in a duopoly industry.
Also read: Schaeffler India’s growth needs speed to justify rich valuation
