The finance ministry wants the capital and commodities markets regulator, SEBI, to implement measures that boost growth of cash equity market, sources told Moneycontrol.

The equity derivatives market has been growing rapidly in the recent years and the ministry is not comfortable with its disproportionate growth vis-à-vis the cash market.

In 2017, F&O turnover was 18.21 times that of cash market turnover compared to 9.32 times in 2011 and 3.06 times in 2009

The government feels that the retail participation in the derivatives market should be restricted as the risk is higher.

Sources also tell Moneycontrol that SEBI might introduce new measures for trading in the equity derivatives market in the next board meeting, which is scheduled for first week of February.

“SEBI might increase contract size from 5 lakh to 10 lakh in the next meeting,” said a source.

The finance ministry wants Securities and Exchange Board of India to implement most of the measures proposed in the discussion paper that was released in July 2017.

“We are cautious about current ratio of derivative and cash market which is so high. We have been seeing number of investors in derivatives are coming down due to lack of knowledge. SEBI should make restricted entry in derivative segment for individuals,” a senior finance ministry official told Moneycontrol.

“However, finance ministry and SEBI both are concerned about liquidity in the market. Once we start taking cautious steps on derivatives, there might be a decline in liquidity — that is one side of argument,” the source said

The ratio of derivatives to cash market turnover in India , is the second highest across the world after Korea. And the percentage of non-institutional trades in derivatives accounts for more than 58 percent which is quite high, say market experts.

The number of derivatives investors is also shrinking. In 2010, there were 10.60 lakh investors and in 2017, the number has come down to 5.70 lakhs.

A senior official of SEBI told moneycontrol: “The number of investors coming down is a cause of concern for us. Derivative is risky instrument and most of investors are not aware about the risk of derivative which is in future and option. And investor never turned up to equity market”.

SEBI Board Meeting

The regulator might discuss physical settlement norms for stocks’ options and futures. In some markets, like India, high trading volumes are seen in derivatives of individual stocks as opposed to indices. The regulator is also concerned about this.

The other markets where stock futures are traded actively are Korea Exchange, Moscow Exchange and Eurex.

“Indices are at all-time high right now and this is the right time to implement any tough measures for betterment of the market. Since inflows via mutual funds is high, negative news in the market can be tackled easily,” said a market expert.

Some experts say that one way of discouraging individual investors from trading in derivatives market is to address the lower taxes. Currently, securities transaction tax in the case of options trade is levied only on the premium amount. In the cash market, this is charged on the entire traded value of the transaction.