Sebi on Alert as Stocks Hit Position Limits Frequently

REGULATOR SUSPECTS SOME PEOPLE ACTING IN CONCERT

Recent instances of stocks hitting the market-wide position limit, or MWPL, in the derivatives segment have raised eyebrows, drawing regulatory attention. 
The MWPL has been devised to curb excessive speculation, but brokers say the current structure leaves a lot of scope to influence prices in certain cases. While there are broker and client-wise limits, analysts say it is not that difficult to get around these, which could be evident from the large movement in a stock's price after the position limits are hit. 
CORNERING COUNTERS 
Sources said the regulator is concerned as it has found that several clients have been hitting the 5% limit applicable to them in single stock futures. "If several people do this with a common objective, it is like persons acting in concert and results in cornering of the open interest," said a senior Sebi official. 
"It is fair as long as it is based on fundamental developments, but if it is artificially cornered, subsequent contracts may go up in price much more than they should," the official said not wanting to be named. 
Incidentally, there are growing instances of unusual rise in spot prices when a counter is under the F&O market limit. For instance, recently Pantaloon gained 36% in 20 days while it was in MWPL ban. 
In November, shares of Suzlon gained 20% while it was trading under the ban period. Similarly, shares of Welspun, United Spirits and IVRCL gained significantly in just a matter of days during the ban period. "We are seeing a lot of stocks hitting the MWPL limit. Many of these aggressive positions are built up when the market has some knowledge of developments. The underlying also has to move in a favourable direction if the trader has to benefit from securities in the ban period," said Rikesh Parikh, vicepresident, equities, at Motilal Oswal Securities. 
Brokers say it is not impossible for a few people to corner stocks with low free float. "While there are safeguards in terms of broker-wise and client-wise limits, it is not difficult to get around these restrictions," said a derivatives trader at domestic brokerage. 
Breaching Limits 
Large number of stocks hitting market wide position limits, or MWPL 
Sebi concerned as it feels a few are cornering most of the open interest 
MWPL calculated on 20% of non-promoter holding and includes F&O positions 
Outstanding positions 
in security should not exceed 95% f this 20% limit 
300 crore 
The revised minimum MWPL requirement 
200 crore 
Scrips failing to maintain this minimum requirement cease to be in F&O Low-Float Stocks Vulnerable 
THE MECHANICS 
MWPL is calculated on 20% of the non-promoter holding in a stock and includes positions taken in futures and options. For instance, if the equity base of a company consists of 1 crore shares with non-promoter holding at 40% (40 lakh shares), the number of shares considered for MWPL will be 8 lakh shares (20% of the 40 lakh shares). 
At the end of the trading session, the outstanding positions in that security should not exceed 95% of this 20% limit. So in this case, the outstanding positions should not be more than 7.6 lakh shares (95% of 8 lakh shares). If that limit is exceeded, the exchange bans traders from taking fresh positions till some of the existing positions are unwound. 
Brokers say if the floating stock in a certain stock futures is low, it is vulnerable to manipulation. For instance, if the value of MWPL in a certain stock is around . 300 crore, theoretically it is possible for a group of operators to corner this quantity by paying a margin of 25%, ie . 75 crore. 
However, the exclusion of many stocks from F&O have gone down after the regulator tightened the norms, making some stocks ineligible for the derivatives segment. In July, it revised the minimum MWPL requirement to . 300 crore from . 100 crore earlier. It also said that scrips which fail to maintain a minimum MWPL requirement of . 200 crore would cease to be in the F&O segment; earlier the limit was . 60 crore. 
THE OPTIONS GAME 
Brokers say there is a need to review the process to calculate MWPL so that the stock does not hit the limit too often. Some also suggest that the weightage of an options contract should be lower while calculating MWPL if the contracts are deep out of the money. Yogesh Radke, head of quantitative research, Edelweiss Securities, says that one of the ways could be to keep separate limits for futures and option for calculation of positions. "Many instances have been seen where the stock goes in ban due to open interest being created in deep-out-of-themoney option with a very low premium." 
Exchanges also provide the list of clients that have more than 3% positions in stocks on an individual basis. However, it is not difficult to sidestep this. Further, market participants say that friendly brokers enter into bulk contracts of deep-outof-the-money options contracts due to which the market-wide position limit is hit. 
This is because having a position in options, especially deep-out-ofthe-money option, is comparatively cheaper as compared to buying in futures. Once manipulators manage to corner the derivatives contracts of a certain stock and push it into the curb list, new players keep away from it.