The J. R. Verma Committee felt that there was a need to protect particularly the small investors who may be lured by the sheer speculative gains in this market where threshold limit of the transactions has been pegged not below Rs. 2 lakhs. This has compelled the retail investors to approach the markets through the indirect routes like mutual funds, etc.

Chauhan & Thomas clearly point out that intermediaries operating in Indian capital markets still lack

(a) a single interface for dealing in both spot and derivatives markets, thus compounding inefficiency in executing simultaneous trading strategies;
(b) essential analytical tools and adequate systems to support trading and risk management;
(c) proper back office control and containment systems which ultimately hinder the growth in the market.

RBI stipulations restricting entry of players into some part of derivative market and other stringent regulations restrict Free trade in the derivative markets.

Price recovery and narrow risk-bearing capacity on the part of option-writers is yet another concern as it makes risk hedging for more than one calendar quarter very difficult for investors.

Prospects

The derivatives market in India, which hangs between nascence and maturity stage, holds high prospects.

Introduction of three new products - options on index, options on individuals and covered warrants - enabling FIIs, foreign insurance companies and mutual funds to participate more fully in derivatives markets, along with the availability of a wider range of derivatives, would enhance the use and quality of equity derivatives as considerably 'more perfect' rather than still 'highly imperfect' risk-management instruments. The recent ICICI bond issue bundles a twelve- year expiration BSE Sensex warrants with the bond. If this warrant is detached and traded, it would be an exchange-traded index derivatives.

The established mind-sets of regulatory and tax authorities on 'speculation' is limiting the propensity of option writers to be bolder in market - making for derivatives contracts. Jogani & Fernandes, in their paper, make the case that arbitrage is not opportunistic or counterproductive speculation but an essential form of financial intermediation that makes markets more efficient by smoothing out price distortions. Thus, Policies should now shift to ensure the soundness of information and transparency such that wider investor participation can be attained.

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* Contributed by -
Nidhi Sethi,
Batch of 2006,
IMT Ghaziabad.