SEBI Delays NCDEX and MSE’s Entry into India’s Options Market: What It Means for Investors and Exchanges

India’s financial markets regulator, the Securities and Exchange Board of India (SEBI), has taken a cautious stance on the expansion of newer stock exchanges into the country’s booming options market. According to sources, SEBI has halted plans by the National Commodity & Derivatives Exchange (NCDEX) and the Metropolitan Stock Exchange (MSE) to begin trading in equity derivatives, particularly options, until they strengthen their underlying cash equity operations and demonstrate adequate market liquidity.

SEBI delays NCDEX and MSE’s entry into India’s options market, emphasizing the need for stronger cash equity operations and market liquidity.

The move marks a significant moment for both exchanges, which had sought permission from SEBI late last year to diversify their product offerings beyond their traditional segments. While NCDEX mainly operates in agricultural commodities, the MSE has a focus on currency derivatives and thin equity trading volumes. Both exchanges had hoped to broaden their business by entering the equity and equity derivatives segments, including options trading.

Why SEBI Took This Step

The regulator’s decision stems from broader concerns about the structure and stability of India’s equity derivatives market. In recent years, the options and futures segment has grown far faster than the underlying cash equity market, a trend that is atypical compared to global markets. In major financial centres worldwide, derivatives markets are usually a modest fraction of the size of the cash market often just 2% to 3%. In India, however, derivatives trading volume has surged, at times numbering many times the size of the stock market itself.

SEBI appears keen to ensure that new exchanges build strong and liquid cash equity markets first, rather than leaning on derivatives products like options and futures that can attract speculative trading but sometimes lack deep underlying support. Regulators have indicated that sufficient liquidity, investor participation, and robust price discovery mechanisms in the equity segment are prerequisites before any approval for equity derivatives trading can be granted.

Impact on NCDEX and MSE

For both the NCDEX and the MSE, SEBI’s decision represents a temporary setback in their expansion plans. Despite raising significant capital in 2025 to fund new initiatives, including equity trading platforms and technology upgrades, both exchanges must now continue to focus on:

• Growing cash market participation

• Increasing trade volumes and liquidity

• Strengthening technological infrastructure

  
  

NCDEX raised approximately ₹7.7 billion (around $85 million) from investors including global trading firms as part of its diversification strategy, while MSE secured about ₹12 billion from private equity and brokerage firms to bolster its equity segment. However, without a vibrant cash market base and enhanced technology, SEBI’s directive means their options trading ambitions are on hold.

Broader Market Context

India’s derivatives markets are among the world’s most active, with the National Stock Exchange (NSE) dominating the options space. In fact, NSE accounts for more than 70% of index options traded globally, a testament to the depth and popularity of these products among institutional and retail traders alike.

At the same time, regulators have taken other steps in recent years to balance growth and risk in these markets. For example, SEBI has introduced new rules aimed at reducing excessive speculation, such as revised position limits and stronger monitoring practices in the futures and options (F&O) segment. These measures reflect an ongoing effort to ensure that rapid growth in derivative trading does not occur at the expense of market stability or investor protection.

What This Means for Investors

For traders and investors, SEBI’s decision reinforces the regulator’s view that market integrity and investor protection should take priority over rapid expansion of derivative products. Investors should also be aware that:

• New exchanges cannot begin offering options contracts until they establish strong cash equity markets

• Competition in the derivatives space will continue to be dominated by established players like NSE and BSE

• SEBI remains vigilant about balancing market innovation with systemic risk controls

Analysts believe that NCDEX and MSE will continue to build their equity segments and focus on technology upgrades, which could eventually pave the way for a stronger challenge to existing exchanges but only once they meet SEBI’s criteria for market depth and liquidity.

Looking Ahead

SEBI’s cautious approach underlines the regulator’s broader philosophy: a robust equity market foundation is essential for the healthy growth of derivatives trading. For NCDEX and MSE, the regulator’s stance is a reminder that diversifying into options requires more than ambition it demands structural strength and market participation. As India’s financial markets continue to evolve, both exchanges are expected to intensify efforts to build cash market liquidity, onboard more participants, and strengthen technological infrastructure in the months ahead.