The Securities and Exchange Board of India (SEBI) on Wednesday approved in principle a range of derivative products in stocks, bonds and currency.
In an effort to widen the market, SEBI has cleared the introduction of mini-contracts on equity indices, options contracts with longer life, a volatility index and futures and options based on it, bond indices and futures contracts on them, and exchange-traded currency futures.
"As a step to progressively encourage markets to move onshore, the SEBI board, in principle, approved introduction of new derivative products for the Indian market based on the interim recommendations of the SEBI committee on derivatives headed by Prof M Rammohan Rao," said the SEBI release.
SEBI has banned foreign investors from issuing derivative products (participatory notes) to their clients based on the derivatives traded on Indian exchanges. Foreign investors who wish to issue derivative instruments based on the stocks they purchase have been asked to register directly instead of channeling trades through sub-accounts. The introduction of these new derivative products is expected to help foreigners hedge directly instead of through participatory notes.
"This is a very good move. There is a complete range of hedging products available in the Indian market," said Sanjiv Shah, executive director, Benchmark Mutual Fund.
The introduction of products based on debt and currency is expected to broaden the market. Long-tenure contracts will help investors with a two-three year planning horizon. Currently, futures contracts are available for up to three months.
The volatility index is a measure of how sharply the market moves and a derivative based on it is an enhanced product that allows one to hedge against an already hedged position.