Derivatives market in India | Gupta Committee recommendations

Derivatives market in India is still at the initial stage of development and it is confined only to index numbers. India has a derivatives exchange and it is based on on line screen based trading system. But the derivatives trading is a separate segment in the stock market. There should be a minimum of 50 trading members to start derivative trading. There are two types of members namely, members of a derivative exchange and clearing members. The net worth of a clearing member should be INR 3 corers. The minimum contract size for a derivatives contract should be INR 1 lakh. Both futures and options are required for introducing derivatives market.

Recommendations of Gupta Committee on derivatives market in India:

Gupta Committee was appointed in November 1996 to begin derivatives trading in stock index future by June 2000.

Gupta Committee recommended the following regarding the trading of derivatives contracts in the Indian stock market.

Rules regarding exchange operations:

Derivatives contracts can be traded in a screen based trading system with on line facilities. Existing stock exchanges can carry out derivatives trading as a separate segment.

Membership:

A minimum of 50 members are required to start derivatives trading exchange in India. The members involved in derivatives trading in India must have certain minimum net worth of Rs. 3 crores.

Products:

The derivatives products must be approved by SEBI which consist of securities which should protect the interests of investors.

Participants:

There should be no restrictions on investment institutions such as mutual funds and other companies in the derivatives market. Margin money will be collected from all the participants.

Trading regulations:

There should be a clear disclosure of risks on each security which should be supplied by the broker.

Contract note:

Contract note must be duly stamped and timed.

Clearing regulations:

For proper functioning of derivatives market in India, the rules pertaining to clearing arrangements with the clearing corporations should be made. Deposit should also be made with the clearing corporation.

Apart from the above recommendations of the Gupta committee, SEBI also has imposed certain eligibility criteria for derivatives market in India.

Purpose of introducing derivatives market in India:

The purpose of introducing derivatives is to minimize risks arising out of fluctuations in the prices of securities. Derivatives market in India plays a major role in risk management as Hedging is practiced through call option and put option. These measures will strengthen trading in securities as well in various foreign currencies. When the volume and value increase, the magnitude of risks faced by the participants also increases. Increased loss will affect trading in securities as well as currencies. Hence, derivatives market is recommended which provides a cover against fluctuations in the price of securities and currencies.