A committee of capital market regulator Securities and Exchange Board of India will consider the issue of restricting mutual funds from selling an equity product that involves betting on future prices.
The SEBI Mutual Fund Advisory Committee is concerned that this is not mutual funds' core activity, and may take a decision on 31 May, according to a PTI report quoting anonymous sources.
Equity options is a derivative product where investors bet on future value of stocks or their indices, and SEBI is against mutual funds getting into the hedging business, as they could suffer losses.
In a letter sent to all fund houses recently, SEBI had sought proposals from asset management companies (AMCs) regarding selling of equity options and an increased disclosure of their investment in this segment, sources in fund houses told the agency.
Industry body Association of Mutual Funds of India (AMFI) has already submitted its views in consultation with industry players. The proposal would be discussed on 31 May, a SEBI source said on condition of anonymity.
Mutual funds have already submitted their view to SEBI and they may be reviewed at the SEBI's Mutual Fund Advisory Committee meeting scheduled on 31 May.
Industry players said SEBI has been looking at ways and means of regulating distribution of mutual funds products and also mutual funds' investment in derivatives.
Selling an option usually involves huge losses as the underwriter gets exposed to unlimited risks when market becomes volatile or collapses or hits the upper circuit. The objective of SEBI could be to ensure that mutual funds can hedge by buying options, but they should not underwrite the option as it is not the core business of mutual funds to take risk this way.