When Geojit tried to fix what Sebi couldn’t

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MD, Geojit Financial Services Limited

Mumbai: When warnings from the regulator and steep losses for clients failed to curb the retail frenzy for derivatives, Chenayappillil John George took matters into his hands.

Five months ago, the founder and MD of Geojit Financial Services put up hoardings at 180 spots across the broking company’s home state of Kerala, flagging the pitfalls of derivatives trading in which most retail traders lose money.

By his own admission, George wasn’t guided by “altruism” but “sound logic” that a business that resulted in “big-ticket losses” for his clients wouldn’t be sustainable in the long term. The funds for the campaign, came from the listed company’s corporate social responsibility (CSR) funds of nearly ₹3 crore.

Geojit’s hoardings cite points from a Securities and Exchange Board of India (Sebi) study highlighting the steep losses in derivatives trading and urge investors not to fall for fake claims of super-riches. The campaign will run till the end of March.

The Sebi study, which was released last January, showed that nine out of 10 individual traders lost an average of ₹1.1 lakh in FY22, and that the average loss of a loss-maker was over 15 times the average profit of a profit-maker. The regulator asked brokers in May 2023 to alert investors about the risks in derivatives on their websites, as well as every time they place a derivatives order. At its December board meeting, Sebi chairperson Madhabi Puri Buch expressed concern about retail investors in equity derivatives trading, saying it was the regulator’s responsibility to caution investors.

All that hasn’t helped: Driven by retail and proprietary traders, volumes in futures and options in India surged 77% in FY24 to ₹64,789 trillion from a year ago, and a steep tenfold from ₹6,436 trillion in FY21. Cash volumes on the NSE stood at ₹158 trillion so far this fiscal, a minuscule 2.6% growth since FY21.

“I have no way to measure its (the campaign’s) success,” George admitted. “And it looks like the campaign hasn’t struck the chord it intended to, going by the surge in derivatives trading volumes.”

“While the pressing need for such an exercise existed long before the campaign actually started, I got the courage to launch it after the Sebi study and an experience of a surgeon who happens to be close friend,” George said in an interview. The surgeon narrated how her assistant surgeon left a surgery midway to check what he confessed later to be an F&O trade on his mobile app.

Despite the campaign ending in March, George has received accolades for it from retired chief additional secretary (revenue) P. H. Kurian, who now chairs the Kerala Real Estate Regulatory Authority.

“His mission is indeed credible and praiseworthy as F&O is a money-spinner for most of George’s ilk, who would never dream of uttering anything against such a business,” Kurian said. He believes the campaign would have succeeded if the hoardings had displayed the benefits of systematic investment plans (SIPs) along with the warnings on F&O.

In addition to the hoardings, George has over the past few years doubled the variable pay for staff who get more clients for the SIP business—Geojit also acts as a mutual fund distributor, thanks to its 500 pan India branches—and halved the incentive for those who get more retail client business for derivatives.

Consequently, Geojit’s SIP book assets have jumped to ₹12,000 crore currently from ₹500 crore in 2017 and the share delivery component of the broking income mix has increased to 75% from 60% in FY16, with F&O and intraday trading contributing only 25% to broking income.

George said he is committed to growing the company’s SIP book and feels that loss-making derivatives clients will one day shift to SIP investing in due course.

The sliver of that hope might just be showing. The share of retail investors as a percentage of gross equity derivatives turnover on NSE, the world’s largest derivatives exchange, fell to a five-year low of 25.7% in December. Retail share trails only proprietary traders whose share stood at 59.1%, followed by 6.1% for FPIs, 4.6% for corporates, 0.1% for DIIs and 4.4% for others.

However, In terms of index options’ open interest, a measure of money flowing into the market, retail share stood at ₹4.2 trillion, or 40% of total open interest in FY24 (April-December 2023), way ahead of proprietary traders ( ₹2.27 trillion) and corporates ( ₹1.3 trillion). Index options—Nifty and Bank Nifty—account for 99% of notional derivatives turnover on NSE.

First published in Mint

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