Markets regulator Sebi Chief Tuhin Kanta Pandey has ruled out the possibility of an aptitude test for retail traders wanting to participates in the Futures & Options (F&O) segment, saying it is impractical and prone to regulatory overreach.

The Securities and Exchange Board of India (Sebi) had earlier introduced measures in November last year in a bid to curb excess speculation in derivatives. These regulatory steps came in the wake of a Sebi study that revealed a staggering 9 out of 10 retail investors lose money while trading in F&O instruments.

When asked about the industry’s suggestion of introducing tests for retail investors before permitting them to trade in risky derivative products, Pandey clarified the regulator’s stance. “Right now, we aren’t really considering any of those things.”

He explained the concerns of practicality and effectiveness behind such proposals. “Number one, we have to also see, will it be a regulatory overreach? Will you be able to effectively do it?, he told PTI in an interview. Sebi, he clarified, already has certification mechanisms for specific market participants.

“I mean, we do have for specific players, those who are registered with the system, we do have this. Like for example, NISM certification is there for several. Like you are a registered advisor or an IA or RA.” But applying this to millions of retail traders would be a different challenge altogether.

“… 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 taken? How will it be passed? So, we have to see the pragmatism of it also. I don’t think that, you know, anything of that kind is on our horizon at the moment,” he said.

He stressed the importance of individual choice when it comes to managing personal finances, noting that people should have the autonomy to decide how to use their money.

“We have to really give the choice of people’s own money to themselves. We also very much discourage the leverage for trading,” he said.

India has sufficient checks and balances to tackle frauds, and nobody should have the impression that “systems are not working” whenever any scam comes to light, Sebi chairman has said.

Sebi’s newly-appointed chief said generally there is a tendency to be influenced by anecdotal evidence and form perceptions on frauds without going into the statistics.

“… There are checks and balances happening; the exchanges are first line regulators, a lot of disclosures are happening, a lot of auditors are doing their job. So let us not think that… the systems are really not working,” Pandey told PTI in an interview.

It is the number of people violating norms or committing frauds which should be a matter of concern, Pandey added.

When asked about a recent case involving a private sector bank where auditors were found wanting and murmurs of stock sale by senior executives, Pandey avoided a direct answer but said the regulator always looks into such cases and takes insider trading very seriously.

Sebi acts whenever it finds instances of egregious behavior and seeks to build a watertight case which can survive legal challenges, he said

Emphasising individual responsibility, Sebi chairman drew parallels with behavioral tendencies and human psychology when it comes to risk-taking.

“…every time, you do the F&O training, you will have a papa saying like a statutory warning, cigarette smoking is injurious to health. People do again smoke cigarettes still. So, I think … if it is an addiction and if you are mindful of risk very clearly, then it is a different thing,” he said.

He acknowledged that if trading becomes an addiction, it moves into the realm of a “de-addiction” issue, which needs to be seen from a different lens.

“To some extent, I think we have to really see, we have to also respect individual choice while you give so much of it. Because people do make experiment many a time and then they learn from mistakes and then they become in fact very much better players also,” he added.

On the broader regulatory view, he reiterated that Sebi discourages leveraged trading due to its high-risk nature.

“We also very much discourage the leverage for trading. I mean, trying to borrow money and interest in that type of way…in fact in Indian jurisdiction, really leverage buyouts are not allowed. You don’t have leverages for this. Even in the AIF industry, we don’t allow leverage, the high-risk thing. So, there is normally a situation in that you can do as much. But you can’t really control people’s lives and resources.”

“In a democratic country, they have to have their own choice,” he added.