For, it appears, investors are being lured into derivative schemes by verbal assurances of returns, something not permitted by the market regulator, the Securities and Exchange Board of India.
In the recent past, Sebi and the National Stock Exchange have received several complaints against wealth managers or brokers. Complainants say their money was diverted for trading in index options with a promise of a certain fixed return.
However, they lost money as the bets went wrong.
These schemes have been under watch after a derivative product, Options Maxima, run by Aditya Birla Finance, lost an estimated Rs 100 crore (Rs 1 billion) and went bust last year.
Also, losses to the tune of Rs 300 crore (Rs 3 billion) came to light in the case of trades (mainly index options) conducted by Citi Group's now jailed wealth manager, Shivraj Puri, through a couple of brokerage houses.
An official from Sebi said, "In most cases, there is a private arrangement between clients and the sellers of such schemes, so we are issuing warnings to brokerages against luring clients with promises."
Source, concerns
According to this official, another area of concern was the source of funds, as index option volumes had surged alarmingly in recent times.
"This requires following of proper know your customer norms, which is where we will crack the whip if irregularities are found," added the official.
A fat commission on option trades is the key reason why brokerages are encouraging and inducing clients to dabble in this segment.
Most brokers charge a flat fee in the range of Rs 50 to Rs 100 per lot per leg -- on each buy and sell transaction -- in the options segment.
In cases where volumes are high, the cost could be lower.
Also, the risk element is relatively less for stock brokers in allowing the clients to trade (especially when buying) in index options.
To play in Nifty options, one has to pay just a premium on the strike
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