Markets regulator SEBI may soon set a trading limit for retail investors based on their income or net worth.

Simply put, retail participants in the equity and commodity markets may have to submit a net worth certificate to their brokers. Their trading limits cannot exceed their income levels.

This follows the proposal by the committee on fair market conduct, headed by TK Vishwanathan, a former secretary-general of the Lok Sabha and an ex-Law Secretary, that SEBI limit the trading activity of retail participants, mainly in the equity market, based on their net worth.

SEBI is likely to consider the recommendation and implement it in 2018, sources said. It is likely that SEBI will bring a 40-50 per cent cap on the position limit of retail players in the derivative segment, they added.

Net worth is defined as the value of all financial and non-financial assets owned by an individual minus his liabilities.

Thus, if the net worth of an individual is ₹10 lakh, his trading limit will not exceed that.

According to experts, stock markets thrive on leverage and attempts to curb it have often led to sharp a decline in volumes and widening of price spreads, making the markets unattractive.

This can have major ramifications for India’s equity and commodity markets, as it could lead to a severe liquidity crunch, brokers and market-watchers told BusinessLine. Initially, it could lead to a massive unwinding of positions in the derivatives segment and trigger a cash market sell-off as retail participants rush to adjust their trades.

Can bring back dabba trading

Such a step by SEBI could even push market players towards ‘dabba trading,’ or the infamous bucket shops where order matching is done off the exchange platform and settlement is via cash.

Brokers say that the point of the net worth criterion is ‘blunt’ when one sees it in the light of upfront margin requirement and lot sizes that are already stipulated by SEBI. Margin is the minimum amount of money initially collected from clients to allocate position that is strictly monitored by exchanges and clearing houses.

Brokers also say it could ensure the institutional monopolisation of the capital market at the expense of the country’s small investors who are being pushed either to mutual funds, which too are marred by high costs, or the grey market. Further, such a scheme could drive up the compliance cost and there would be clients unwilling to share data on their assets and liabilities.

“Over-regulation often leads to higher compliance cost and could be counter-productive for the markets,” said Deven Choksey, MD, KR Choksey Investment Managers.

“Stock brokers catering to retail clients would have a tough time as the compliance cost — like that for maintaining call records — was anyway eating into their business,” said Sudip Bandyopadhyay, Group Chairman, Inditrade Capital.

Retail position in excess of ₹10,000 crore may be outstanding currently in India’s equity derivatives market.