Sebi chief warns against ‘sledgehammer’ regulation in complex F&O market

“Any regulator in any sector needs to balance these two sides,” the Sebi chief said at the Mint India Investment Summit and Awards 2025 in Mumbai on Saturday.

“F&O itself is a complex market. We cannot have a sledgehammer or a blunt approach; we need a surgeon’s knife. We need to know exactly how, otherwise innovations will be lost,” Pandey said, stressing the importance of nuanced, data-driven regulation to avoid stifling innovation.

Pandey’s comments come in the wake of Sebi’s 1 October measures to curb excess speculation in derivatives. These measures include increasing index contract sizes and limiting weekly expiries.

Additionally, a proposal to revise the ₹500 crore exposure limit for index F&Os, initially floated at the end of February, is being reviewed following negative feedback from market participants. Stakeholders argued that the new gross limit would reduce liquidity and widen bid-ask spreads, increasing trading costs.

Also read | Traders fear hit on market volumes. Will Sebi defer intraday position rule?

One of the six measures — implementation of intra-day monitoring of position limits — initially scheduled for 1 April, was also deferred due to concerns raised by industry associations about the readiness of stock brokers’ systems and their clients.

Addressing concerns about retail participation in F&O, Pandey stated that simply raising the threshold for retail investors would not solve the underlying systemic issues. He highlighted the critical role of F&O markets in hedging risks, price discovery, and overall market development, while acknowledging a Sebi study which showed that over 90% of small derivatives investors were losing money. This, Pandey emphasized, pointed to a need for a more comprehensive solution that addresses both awareness and systemic problems.

Clearing corporations

The proposed reduction of stock exchanges’ stakes in clearing corporations (CCs) is a major factor delaying the no-objection certificate to be given for the listing of the National Stock Exchange (NSE), Pandey revealed. He also cited governance, technology, and ongoing litigation as other issues requiring resolution before NSE can proceed with its initial public offer (IPO).

Also read | NSE shrinks monthslong share transfer process to days ahead of a likely IPO

In November 2024, Sebi had proposed making CCs more independent by distributing 49% of their shares to existing shareholders of the parent exchange, with the exchange retaining 51%. Over time, the parent exchange would reduce its stake to below 15%, potentially through sales to other exchanges. The proposal is still awaiting Sebi approval.

Sebi raised concerns in February 2025 about potential conflicts of interest due to NSE’s dominant ownership of NSE Clearing Ltd (NCL). The regulator emphasized the importance of CCs being perceived as independent to ensure a level playing field among market infrastructure institutions (MIIs). Sebi requested clarity on how these concerns will be addressed before the NSE’s IPO, noting that divesting NCL could impact NSE’s financials.

NSE sought a no-objection certification on the IPO from Sebi on 27 August, 2024, but Sebi raised concerns about technical glitches and issues with key managerial personnel (KMP) that could lead to system failures. Sebi also requested an action plan regarding the settlement of ongoing legal cases involving NSE.

Streamlining regulations

In its 28 March response, NSE defended its ownership of NCL, stating it complies with existing regulations, with separate governance ensuring arm’s length transactions. NSE also noted that divesting NCL could strengthen its reserves.

Also read | Mint Explainer: What Sebi decided at its first board meeting under the new chief

The exchange also expressed its desire to settle pending matters amicably and reiterated its request for a settlement mechanism, awaiting Sebi’s formal response.

On Saturday, Pandey also addressed the challenges faced by registered investment advisors (RIAs) in India, identifying high entry barriers and cumbersome regulations as key obstacles. One of the issues is the restriction on performance monitoring, preventing RIAs from showcasing their experience, even those with over a decade in the field. “RIAs cannot do performance monitoring unless they come up with performance evaluation metrics validated by a group,” he said.

To be sure, RIAs are barred from showing their performance over the last one year. They can show returns for a period of more than a year. There are around 1,300 RIAs in the country, based on industry estimates.

Pandey affirmed Sebi’s commitment to streamlining regulations, stating that the regulator will “weed out” outdated policies and rationalize necessary ones to achieve optimal regulation, reduce compliance burdens, and lower the cost of doing business.

Also read | Mint Explainer: How Sebi’s new proposals aim to curb risks in derivatives market

He also highlighted Sebi’s efforts to expedite fundraising in the markets, both by prescribing norms for issuers and by using technology, including artificial intelligence, to clear fundraising documents quickly without compromising disclosures.

Pandey emphasized that Sebi will enforce regulations to address misconduct among market participants through a combination of off-site supervision and on-site and thematic inspections. He also urged market participants to voluntarily comply with regulations.