F&O curbs: SEBI and taxes squeeze retail trading

Why retail F&O is back in focus

India’s equity derivatives market is being reshaped by policy. Social media discussion has shifted from “easy expiry profits” to costs and compliance. SEBI stepped in after concerns on heavy retail losses. The regulator also flagged extreme expiry-day index options volumes. Many changes are designed to curb speculation in ultra-short timeframes. The tone has also changed in industry commentary. Some participants now back tighter eligibility and suitability norms. Others argue product-level changes are enough for safety. The debate matters because retail participation expanded sharply earlier.

What SEBI has already tightened since late 2024

The current phase started with a crackdown from October 2024. SEBI introduced multiple measures from November 2024 onward. Weekly index derivatives were rationalised to reduce excess activity. Tail-risk coverage on expiry days was increased. Contract sizes for index derivatives were raised. Upfront collection of option premiums from buyers was introduced. These moves reduced some expiry-day trading intensity. They also pushed traders to reassess sizing and risk. Industry feedback suggests behaviour changed less than participation.

Volumes fell, and retail participation dropped

Options trading volumes in India fell 51% in FY26. This drop followed SEBI’s tighter derivatives rules. Retail participation saw its first decline in nearly a decade. One set of data points to individual traders falling to 87.5 lakh in FY26. A Finance Ministry reply in the Rajya Sabha cited 78.6 lakh in FY26. The same reply cited 98.1 lakh individual traders in FY25. Aggregate losses fell, but the picture stayed mixed. Those who continued reportedly lost over ₹1 lakh per person on average.

Higher costs from April 1 add another hurdle

Trading costs are set to rise from April 1. New government taxes on futures and options will increase expenses. The Union Budget for 2026-27 hiked the Securities Transaction Tax. STT on equity futures is to rise to 0.05% from 0.02%. STT on options premiums is to rise to 0.15% from 0.1%. Separately, the RBI’s stricter lending rules for brokers also take effect. Commentators expect volumes to decline further, especially for retail. Higher costs also affect arbitrage and hedging economics.

Contract design changes reduced expiry-day churn

Market participants link the volume shift to contract design. Higher contract sizes changed how small traders participate. Uniform expiries also reduced the scope for constant rollover. Upfront premium collection increased capital required for option buying. Increased transaction taxes further raised the break-even threshold. Together, these measures reduced expiry-day churn. Social media chatter reflects fewer ultra-short trades. At the same time, proponents say the market becomes healthier. The context mentions improved stability and participation quality. Critics point out that remaining traders still lose heavily.

SEBI’s new proposals target strikes and settlement

SEBI has proposed a standardised framework for options strikes across exchanges. The stated objective is to address intraday volatility. The proposal aims to keep strikes available around prevailing prices. That, in theory, supports continuity for active traders and hedgers. SEBI is also reviewing expiry-day settlement design. Two settlement options were outlined for expiry day. One is a blended VWAP using the last 30 minutes plus 10 minutes of the Closing Auction Session. The other is a return to the earlier 30-minute continuous-trading VWAP method. Under the second option, SEBI said blended VWAP may be considered after at least one year.

Suitability norms: income tests, thresholds, and pushback

Industry participants are increasingly backing stricter entry checks. Proposals discussed include income thresholds and qualification tests. Some also suggest accredited investor style access for derivatives. The argument is that profiling protects retail better than product tweaks. The context also notes many who exited were low turnover traders. This group was hit by position limits and higher costs. NSE CEO Ashish Kumar Chauhan has publicly supported minimum requirements. He referenced global practices like a $15,000 margin account minimum in some markets. However, some analysts said SEBI is unlikely to introduce entry-level suitability criteria. A prior comment from then whole-time member Ananth Narayan in March 2025 said SEBI was not mulling exams or tests.

Market structure: new F&O entrants, and a halt for new venues

The F&O segment is also expanding at the stock level. Eight stocks are set to enter F&O from April 1. The list mentioned includes Adani Power and Hyundai Motor India. NSE also announced position limits for these entrants. The change follows SEBI’s revised eligibility norms. The stated aim is higher-quality stocks with sufficient market depth. Separately, SEBI has halted NCDEX and MSE from trading equity derivatives. That signals a tighter stance on where derivatives can be offered. It also concentrates activity on existing venues. Traders are watching whether liquidity shifts to new single-stock contracts.

What NSE’s CEO said about participation and safety

Ashish Kumar Chauhan said measures will not slow participation. He pointed to India’s large pool of potential retail investors. In an NDTV Profit interaction, he said participation would continue as markets get safer. He also said markets historically do not slow for long. His comments came while SEBI reviews derivatives changes. SEBI is also reassessing the Closing Auction Session provisions. Pricing methodology and a VWAP-based mechanism are key focus areas. SEBI sought feedback before reassessing CAS provisions. The regulator is also set to announce revisions to the Capital Market Access System soon.

Key measures and timelines discussed online

The rule set is often discussed as a package, not one-off changes. Some measures target expiry-day behaviour directly. Others focus on product suitability and basic risk hygiene. A SEBI circular categorised six measures by purpose. One example cited was on calendar spreads on expiry day. Costs are also changing due to government taxes and broker funding rules. Together, these factors alter retail strategy viability. Traders are comparing pre and post October 2024 conditions. Many discussions now focus on whether losses reduce meaningfully. The government data cited suggests fewer traders, but higher average losses for those who remain.

What to watch next for retail traders

The next set of changes may focus on market plumbing. SEBI’s strike framework could affect intraday execution. Expiry-day settlement changes could alter last-hour strategies. Changes to CAS could influence the closing price impact. Capital Market Access System revisions are also expected soon. Traders will also track how April 1 cost increases flow through. If volumes fall, spreads and liquidity may shift. The addition of eight new F&O stocks could redistribute activity. Regulatory actions on exchanges suggest tighter oversight. The broader question remains whether participation becomes safer without pushing risk elsewhere.