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Unit 2: Evolution of Derivatives in India

open interest of market participants for each market-segment, which has more than 20 Notes
participants. These reports are released every Friday and contain data on open interest split by
reportable and non-reportable open interest as well as commercial and non-commercial open
interest. This type of report is referred to as 'Commitments-Of-Traders'-Report, COT-Report or
simply COTR.
2.2.1 SEBI Act 1992

SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India (SEBI) with
statutory powers for (a) protecting the interests of investors in securities (b) promoting the
development of the securities market and (c) regulating the securities market. Its regulatory
jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition
to all intermediaries and persons associated with securities market.
SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit. In
particular, it has powers for:
1. Regulating the business in stock exchanges and any other securities markets.
2. Registering and regulating the working of stock brokers, sub-brokers etc.
3. Promoting and regulating self-regulatory organizations.
4. Prohibiting fraudulent and unfair trade practices.

5. Calling for information from, undertaking inspection, conducting inquiries and audits of
the stock exchanges, mutual funds and other persons associated with the securities market
and intermediaries and self-regulatory organizations in the securities market.
6. Performing such functions and exercising according to Securities Contracts (Regulation)
Act, 1956, as may be delegated to it by the Central Government.
L.C Gupta Committee Recommendations for Derivative Trading

SEBI set up a 24-member committee under the Chairmanship of Dr. L. C. Gupta to develop the
appropriate regulatory framework for derivatives trading in India. On May 11, 1998 SEBI accepted
the recommendations of the committee and approved the phased introduction of derivatives
trading in India beginning with stock index futures.
The provisions in the SC(R)A and the regulatory framework developed thereunder govern
trading in securities. The amendment of the SC(R)A to include derivatives within the ambit of
'securities' in the SC(R)A made trading in derivatives possible within the framework of that Act.

In India, following are the major regulations for trading of derivatives:
1. Any exchange fulfilling the eligibility criteria as prescribed in the L.C. Gupta committee
report may apply to SEBI for grant of recognition under Section 4 of the SC(R)A, 1956 to
start trading derivatives. The derivatives exchange/segment should have a separate
governing council and representation of trading/clearing members shall be limited to a
maximum of 40% of the total members of the governing council. The exchange shall
regulate the sales practices of its members and will obtain prior approval of SEBI before
start of trading in any derivative contract.
2. The exchange shall have minimum 50 members.
3. The members of an existing segment of the exchange will not automatically become the
members of derivative segment. The members of the derivative segment need to fulfill
the eligibility conditions as laid down by the L.C. Gupta committee.

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