Gupta panel approves norms for derivatives trading

MUMBAI, February 26: The LC Gupta committee on the introduction of derivatives (futures and options) trading in Indian stock exchanges appro...

MUMBAI, February 26: The LC Gupta committee on the introduction of derivatives (futures and options) trading in Indian stock exchanges approved the recommendations made by it on Thursday and called for a review of the governance structure of the existing cash market.

A marathon meeting of the 20-plus committee culminated in the members endorsing the first part of the report which suggests the broad framework and approving the second part pertaining to the bye-laws which should be used as the parameter for regulating the derivatives markets. However, BSE president M G Damani has added a dissent note to many of the proposals.

The panel, set up by the Securities and Exchange Board of India (SEBI), has suggested that mutual funds should be allowed to trade in derivatives for hedging purposes but not for speculation. The minimum net worth for a clearing member would be Rs 3 crore and the initial deposit has been fixed at Rs 50 lakh.

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In a bid to ensure effective regulation, the committee has recommended thata stock exchange would require to inspect the books of all its members participating in the derivatives segment at least once a year.

Currently, an exchange inspects about 10 per cent sample of its members once a year. According to committee chairman L C Gupta, a need was felt to review the governance structure in the existing cash market as the derivatives and cash markets would be interlinked and the success of the former would be dependant on the effectiveness of the latter.

Existing stock exchanges would be allowed to set up a derivatives segment within the exchange or set up a separate exchange. The capability of the exchange to provide effective on-line surveillance would be taken into account before giving the go-ahead for trading in derivatives. A detailed format to ensure a broker-client relationship would also be prescribed.

The bye-laws would now be properly phrased and vetted by a small group of committee members. Barring any significant dissent to the drafting of these bye-laws, the reportwould be made public in about 10 days. "The report is final as far as we are concerned. Only the phrasing of the various clauses in a bid to put them in the correct legal perspective remains to be carried out. This would be done shortly. There does not appear to be any need for the committee to meet again," Gupta said.

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After collaborating suggestions received from the public the report would be taken up by the Sebi board for approval. The committee has also suggested that the legal impediments to the introduction of derivatives trading be removed if the government came out with a notification to include the term derivatives in section 2 (H) of the Securities Contract & Regulations Act SCR(A).