Sebi shuts down calls for F&O trading tests, says financial freedom trumps regulatory overreach

The Securities and Exchange Board of India (Sebi) has categorically dismissed calls for mandatory aptitude tests for retail investors trading in high-risk derivatives, with Chairman Tuhin Kanta Pandey stating that such measures would be impractical and could amount to ‘regulatory overreach’.

The clarification, first reported by the wire service PTI, comes eight months after Sebi rolled out stricter norms for the Futures & Options (F&O) segment, following a study that showed that over 90% of retail traders are losing money in derivatives. While industry stakeholders suggested pre-trading competency tests as a safeguard, Pandey has ruled out the idea, putting emphasis instead on an individual's financial autonomy.

“Right now, we aren’t really considering any of those things,” Pandey told PTI, questioning the feasibility of testing millions of retail participants. “Will it be a regulatory overreach? Will you be able to effectively do it?” Pandey also noted that while Sebi mandates certifications like NISM for registered advisors, extending this to retail traders would be impractical.

“Tomorrow, someone will say, if you want to do it for a mutual fund, then you will have to do an aptitude test. So, who will take it? How will it be passed? We have to see the pragmatism of it,” he said.

Autonomy vs. Addiction

Comparing F&O trading warnings to cigarette health advisories, Pandey acknowledged the limits of regulation in curbing risky behaviour. “People do smoke cigarettes still. If it is an addiction and you’re mindful of risk, that’s different,” he said, stressing that repeated losses often serve as their own lessons: “People experiment, learn from mistakes, and sometimes become better players.”

However, he reiterated Sebi’s stance against leveraged trading, citing its prohibition in sectors like Alternative Investment Funds (AIFs): “We very much discourage leverage. In Indian jurisdiction, leverage buyouts aren’t allowed. But you can’t control people’s lives, in a democracy, they must have choice.“