Mumbai: The Securities and Exchange Board of India (SEBI) is considering extending the tenure and maturity profile of equity derivatives contracts, with Chairman Tuhin Kanta Pandey confirming that a consultation paper will be floated after discussions with stakeholders.

Speaking at FICCI’s 22nd Annual Capital Markets Conference in Mumbai, Pandey said the proposal is still at a conceptual stage and any move will be taken in a calibrated manner. “Improving the tenure (of the F&O contract) really means whether we can have more longer-term derivatives. Qualitatively we have to see (the duration of the contracts), but we have to calibrate it. My statement says in a calibrated manner. This is only in-principle we’re stating, on what we should be doing,” he told reporters on the sidelines of the event.

Markets reacted sharply to the development, with shares of BSE and broking firms such as Angel One and Motilal Oswal falling as much as 5–6 percent. Analysts said investors fear that an increase in contract tenure could affect trading volumes in shorter-dated contracts, which form the bulk of revenue for exchanges and intermediaries.

Pandey, however, stressed that SEBI’s approach would remain consultative. “All this will be done in consultation, in what form, how, when… Yes, there will be a consultation paper. I can’t tell you when, but that is the thinking process we have,” he said.

The regulator has in recent months taken steps to curb speculative activity in the futures and options (F&O) segment. These include restricting exchanges to one weekly contract per underlying and fixing expiry days to limit the proliferation of short-term contracts. SEBI has repeatedly expressed concern over the rise of retail participation in the segment, with its own studies showing that a majority of retail traders in derivatives incur losses.

Pandey underlined that while derivatives remain an important tool for capital formation and risk management, the market needs better quality and balance. “Equity derivatives play an important role in capital formation, but we must ensure quality and balance. We will consult with stakeholders on ways to improve in a calibrated manner the tenor and maturity profile of derivative products, so they better serve hedging and long-term investing,” he said.

The SEBI chief also pointed out the need to deepen the cash equities market alongside reforms in derivatives. “We are looking to deepen the cash equities market... volumes in the cash markets have grown rapidly, doubling in terms of daily trading volumes over a period of just three years. However, much more needs to be done,” he said.

India’s equity derivatives market has grown exponentially since their introduction in 2000, when index futures were first launched. Options followed in 2001, and the market expanded rapidly through the 2000s. Today, India is home to one of the largest F&O markets in the world, with turnover in derivatives far outstripping the cash market. According to exchange data, derivatives account for more than 90 percent of total trading volumes, dominated by index options with very short maturities.

While the growth of derivatives has deepened India’s financial markets and offered sophisticated risk management tools, the rise of retail participation has led to regulatory unease. A SEBI study released in January 2023, “Analysis of Profit and Loss of Individual Traders dealing in Equity F&O Segment,” found that 89 percent of individual traders incurred net losses in FY22, with the average loss per trader at about ₹1.1 lakh. The study also revealed that only 11 percent of traders made profits, underscoring the risks borne by retail investors.

Market experts point out that extending the tenure of contracts could help shift focus from short-term speculative trading to longer-term hedging and investing. Globally, derivative contracts with six-month or one-year maturities are common, while in India contracts are typically limited to one-, two- or three-month maturities. Introducing longer-dated contracts, they argue, could provide institutional investors and companies with better tools for risk management, while also potentially reducing volatility.

At the same time, exchanges and brokers remain concerned about the potential impact on revenues, as shorter-dated contracts have driven a boom in retail trading activity in recent years. The sharp fall in shares of BSE and broking companies following Pandey’s comments reflected these worries.

The proposal, still at an early stage, is expected to spark intense debate among market participants once SEBI releases its consultation paper in the coming months.