SEBI Proposes Tighter Circuits to Contain Volatility

India’s capital markets regulator, the Securities Board of Exchange (Sebi), put forth a proposal with the intention of containing volatility and reducing information asymmetry in the market. The actions that the market regulator intends to take in order to attain the goal involve containing extreme price movements in shares on which futures and options trade. Additionally, it includes formulation for scrips in the derivatives segment to strengthen volatility and minimize information asymmetry in the market.

The boundaries within which competing orders from buyers and sellers are accepted for the day by the stock exchange’s trading system are represented by price bands for scrip or a derivative contract. These price bands are flexible and dynamic for scrips that have derivative contracts on them, depending on day-to-day trading.

Late on Sunday, the Sebi proposed in a consultation paper that trading would be suspended for an hour, up from the current 15 minutes, and then allowed to move only 2%, down from the current 5%, if a share in the futures and options segment falls or rises by 10% per day.

After this, as opposed to the current cap of 5%, such shares should only be allowed to move up to 2%. According to Sebi, the proposals would offer a means of containing worst-case single-day price movement in the stock and extreme market volatility. The recommendations followed a sharp decline in the price of Adani Group shares after the US-based investment firm Hindenburg raised governance issues with the conglomerate in a report in January.

Public comments on the proposal are being accepted by Sebi until June 5. The regulator suggests, in the draught papers, that once the price of the scrip touches the price band, revised temporary ceilings be added to the price bands of options contracts based on the Last Traded Price (LTP) of the options. Taking into account exchange surveillance findings, the goal is to establish daily hard limits for scrips in futures contracts and corresponding price limits in options contracts.