India regulator stalls new exchanges’ entry into options market, sources say

MUMBAI: India’s market regulator has stopped the country’s two newest exchanges from offering trading in equity derivatives and has asked them to build up their share-trading businesses first, two regulatory sources with direct knowledge of the matter said.

Late last year, the National Commodity and Derivatives Exchange (NCDEX) and the Metropolitan Stock Exchange (MSE) separately sought approval from the Securities and Exchange Board of India (SEBI) to launch and develop equity cash and derivative products, according to exchange disclosures.

NCDEX predominantly trades agricultural commodities, while MSE mainly offers currency derivatives and has very thin equity volumes. Both exchanges have been looking to diversify their businesses.

SEBI’s decision underscores continued caution over India’s soaring equity derivatives market, where premiums are now roughly twice the size of the cash market, compared with 2% to 3% in major global economies.

The regulator’s directive to the exchanges telling them to pause plans for derivatives products has not been previously reported.

Despite steps taken to cool derivative trading, India’s NSE remains the most active derivatives exchange, accounting for more than 70% of index options contracts traded worldwide, according to data from World Federation of Exchanges.

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Earlier this month, the government raised transaction taxes to help cool derivative trading volumes. Studies have shown that 90% of retail investors incur losses.

“SEBI wants there to be a gap of at least six months between the launch of cash equities and equity derivatives,” the first source said. “Exchanges won’t be granted permission to launch derivatives until SEBI is satisfied that there is an underlying liquid cash market.”

The regulator does not want new players to further fuel derivatives trading without first establishing an underlying cash market, the source said.

“The exchanges will be required to demonstrate sufficient cash market participation, liquidity and price discovery before being permitted to launch derivatives,” the second source said.

The sources declined to be identified as they are not authorised to speak to the media.

SEBI and NCDEX did not respond to requests for comment.

MSE did not answer questions about its equity derivatives plans but referred Reuters to a statement issued last month that it is “in process of appointing market makers to  strengthen liquidity and market depth in its equity segment.”

Equity trading in India is dominated by the NSE and its older peer BSE.

Both NCDEX and MSE raised capital in 2025 to fund their expansion into equities and upgrade technology.

NCDEX raised 7.7 billion rupees ($85 million) from 61 investors including some global trading giants: Citadel Securities and Tower Research, a U.S.-based high-frequency-trading firm.

MSE raised 12 billion rupees from private equity firms including Peak XV Venture Partners Investments VII and leading India brokerages including Groww and a unit of Zerodha.

SEBI has also asked the two exchanges to upgrade their technology before entering the equity segment.

“Until exchanges demonstrate robust technology, there is no question of them starting equity trading, let alone derivatives,” the first source said.