SEBI appointed the L.C.

Gupta Committee on 18th November 1996 to develop appropriate regulatory

framework for derivatives trading and to recommend suggestive bye-laws for Regulation and Control of
Trading and Settlement of Derivatives Contracts.
The Committee was also to focus on financial derivatives and in particular, equity derivatives.
The Committee submitted its report in March 1998.
The LC Gupta Committee had conducted a wide market survey contacting several entities relevant to derivatives
trading like brokers, mutual funds, banks/FIs, FIIs and merchant banks. The Committee observed that there was a
widespread recognition of the need for derivatives products including Equity, Interest Rate and Currency derivatives
products.
However Stock Index Futures was the most preferred product followed by stock index options. Options on
individual stocks was the third in the order of preference.
RECOMMENDATIONS

The committee strongly recommends the introduction of financial derivatives to

facilitate the hedging in a most cost-effective way against market risks.

There is a need for equity derivatives, interest derivatives and currency derivatives.

There should be phased introduction of the derivative products. To start with, index
futures will be introduced,followed by options on index and options on stocks.

Regulatory framework for derivatives trading envisaged two-level regulation i.e.

exchange-level and SEBI-level, with considerable emphasis on self-regulatory
competence of derivative exchanges under the overall supervision and guidance of
SEBI.

The derivatives trading should take place on a separate segment of the existing stock
exchanges with an independent governing council where the number of trading
members will be limited to 49 percent of the total number. The chairman of the
governing council will not be permitted to trade on any of the stock exchanges.

The settlement of the derivatives will be through an independent clearing corporation

called the clearinghouse, which will act as a counter party for all trades or
alternatively guarantee the settlement of all the trades. The clearing corporation will
have adequate risk containment measures and will collect margins through Electronic
Fund Transfer.

The derivatives exchange will have online trading and surveillance systems. It will
disseminate trade and price information on real time basis through two information
vending networks.

There will be complete segregation of client money at the level of trading/clearing

member and even at the level of the clearing corporation.

The trading and the clearing member will have stringent eligibility conditions. At least
two persons should have passed the certification programme approved by SEBI.

The clearing member should deposit a minimum of Rs. 50 lakh with the clearing
corporations and have a minimum networth of 3 crore.

Removal of regulatory prohibition on the use of derivatives by mutual funds while

making the trustees responsible to restrict the use of derivatives only to hedge and
portfolio balancing and not for speculation.

Creation of a Derivatives Cell, a Derivative Advisory Committee, and Economic

Research Wing by SEBI.

Declaration of derivatives as securities under the section 2(h)(iia) of the SCRA

JC VERMA COMMITTEE
SEBI has setup a Technical Group headed by Prof. J.R Varma to prescribe risk containment measures for new derivative products.
The group has recommended the introduction of Exchange traded Options on Stocks, which is also in conformity with the sequence
of introduction of derivative products recommended by Dr. L.C Gupta Committee.
The Technical Group has recommended the risk containment measure for Exchange traded Options on Stocks.