SEBI experiment backfires; regulator takes U-turn on DNE in Options

SEBI, the Indian stock market regulator, has finally taken a U-Turn on its controversial decision to remove the Do Not Exercise (DNE) facility from Option trading. The SEBI experiment lasted six months during which a huge number of retail investors lost money to, what seemed to be, cartels who could manipulate the market due to removal of DNE facility by the National Stock Exchange.

A new circular dated April 11 by NSE Clearing Ltd, a part of NSE, said, "It may be noted that facility to specify 'Do Not Exercise' instruction on expiry day will be re-introduced in Stock Option contracts with effect from April 28, 2022."

However, the reasons for removal of DNE in the first place remain as unclear as the motivation for the U-turn in rules. And it is still not clear why SEBI has not instituted any inquiry against its own officials and NSE officials for bringing a rule that heavily favoured deep pocketed institutions against retail traders.

Removal of DNE Option from Option Trading was a move by SEBI that essentially changed the very definition of an 'Option' as defined in capital markets across the globe. Fortune India had highlighted the plight of small traders in a two-part series in January and raised questions about the controversial decision that caused financial distress to hundreds of traders who suffered due to systemic market manipulation in Hindalco counter. (read our previous story here)

Fortune India captured the plight of hundreds of retail traders who questioned the reason behind a move that not only was against the global norms followed by stock exchanges but also resulted in monetary distress for retail traders.

Experts say SEBI's flip-flop on DNE Option is a classic case of bureaucratic over-reach where a handful of powerful people altered the fate of thousands without application of mind or conscience. It is disconcerting that the executives responsible for bringing forth the flawed regulations are neither answerable nor punishable for the back-breaking and morale-destroying financial losses of hundreds of retail traders.

The bureaucracy got away by directing NSE Clearing to upload its new circular on the reversal of earlier rules, on its website, late evening on Monday. SEBI has yet not explained the rationale behind the move and its reversal.

The removal of DNE facility had changed Option trading from a "limited-loss deal" to an "unlimited-loss gamble". In the instance of Hindalco Option trade of December 2021 expiry, the removal of DNE facility by SEBI had benefited a synchronised group of Option Writers, with pockets deep enough to hold Hindalco shares worth ₹144 crore. These shares were sold off in subsequent auction at a much higher price. The victims of this rigged game were small traders who suffered individual losses ranging from a few lakh rupees to crores. To know the details read this story.

A questionnaire sent by Fortune India in mid January to SEBI and National Stock Exchange has not elicited any response despite many follow-ups.

In a recent statement, finance minister Nirmala Sitharaman had acknowledged the crucial role played by retail participants in keeping the Indian capital markets buoyant, despite exodus of foreign players.

Speaking with Fortune India, Anand Solanki, a sub-broker who lost ₹42 lakh in just a few hours due to the removal of DNE facility, demanded that SEBI should compensate each and every trader who lost money in Hindalco Option trade (December Expiry) from SEBI's Investor Protection Fund.

"More and more retail traders are joining the stock-market and that is why it is booming. But if people lose confidence in SEBI due to rules favouring the bigger players, and apathy towards injustice done to the common man, for how long will people keep participating in the market?," Solanki asks.

Even though the faulty rule regarding the removal of DNE facility has now been corrected by SEBI, the damage caused by the flawed regulation has left permanent scars on the psyche of the last mile investors and traders. Many retail traders may never fully recover from the financial blow caused due to SEBI executives' lack of judgment that led to the removal of DNE Option from Option trade.

While the corrective move by SEBI brings relief to future traders of Options, the question is- if not SEBI, who is responsible for the losses caused to the victims of Option trades due to defective regulations that made market-manipulations possible in the first place?