At a time when many stocks are experiencing extreme bouts of volatility due to various factors, including negative news flow, the Securities and Exchange Board of India (SEBI) and the stock exchanges have increased the vigil on such stocks by introducing measures to minimise the probability of fraudulent activities.

While the capital markets regulator has tweaked the norms for derivative contracts, especially for such volatile stocks, exchanges have amended the dynamic circuit filters for stocks which are part of the derivative segment.

The capital markets watchdog, which has already laid down a roadmap for all stocks in the derivatives segment move towards physical settlement, has now mandated that stocks that see extreme volatility have to be moved to a physical settlement mechanism immediately from the new expiry cycle. This will be applicable for stocks that witness 10% or more intraday movement on 10 or more occasions in last six months or those that register 10% or more intraday movement on three or more occasions in the last one month.

Physical settlement

Also, stocks that see 25% or more intraday movement on one or more occasions in the last one month would be moved to physical settlement mechanism wherein clients have to settle the contracts with delivery of underlying shares instead of cash.

Earlier, in December 2018, the regulator had directed exchanges to move stock derivatives in a phased manner to physical settlement mechanism based on their respective daily market capitalisation averaged for December 2018.

This assumes significance as the recent past has seen many prominent stocks like Reliance Communications and Dewan Housing Finance along with the Zee Group’s stocks, including Dish TV India, Zee Entertainment Enterprises and Zee Learn, lose heavy ground and see a significant portion of their market capitalisation get eroded in a single trading session.

Incidentally, the five listed companies of Zee Group saw their combined market capitalisation erode by almost ₹14,000 crore in a single day on January 25.

Meanwhile, the National Stock Exchange (NSE) and the BSE have also announced that the dynamic circuit filters of 10%, that are applicable on all stocks that are in the derivative segment, would be relaxed by 5% based on certain parameters.

“It has been decided, in consultation with Secondary Market Advisory Committee (SMAC) of SEBI to review the mechanism for relaxation of the operating ranges applicable to securities for which derivative products are available,” stated a circular issued by both the exchanges.