Why MRF excluded from F&O

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Understanding the Exclusion of Stocks from NSE's Futures & Options Segment: A Deep Dive into SEBI's Revised Regulatory Framework

I. Executive Summary

The National Stock Exchange (NSE) has recently initiated the phased exclusion of several prominent stocks from its Futures & Options (F&O) segment. This significant development is a direct consequence of the Securities and Exchange Board of India's (SEBI) revised and substantially stricter eligibility norms, outlined in a comprehensive circular issued in August 2024. The regulatory action aims to enhance market integrity, foster greater liquidity, and mitigate speculative risks within the derivatives market.

The exclusions are being implemented in distinct phases. An initial group of five stocks, including MRF, Apollo Tyres, Escorts Kubota, Deepak Nitrite, and Ramco Cements, are set to exit the F&O segment by June 2025. This will be followed by a second wave affecting another five securities, namely Aarti Industries, Birlasoft, Hindustan Copper, Mahanagar Gas, and Piramal Enterprises, by August 2025. These changes underscore SEBI's proactive stance in cultivating a more robust and transparent trading environment, ensuring that only stocks meeting stringent liquidity and market depth criteria remain available for derivatives trading.

II. The Recent Exclusions: What Happened?

The National Stock Exchange (NSE) has formally announced the phased exclusion of ten specific securities from its Futures & Options (F&O) segment. This decision implies that, after their specified expiry dates, no new futures or options contracts will be introduced for these particular stocks. The move signals NSE's commitment to fostering a more liquid and efficient market for its participants.

The first set of exclusions will become effective from the June 2025 series. As per an NSE circular dated March 20, 2025, five stocks—Apollo Tyres Ltd., Deepak Nitrite Ltd., Escorts Kubota Ltd., MRF Ltd., and The Ramco Cements Ltd.—will no longer have new F&O contracts available for trading from June 2025 onwards. The last trading day for new contracts in these securities is May 27, 2025, which coincides with the expiry of the May derivatives contracts.

A second group of five stocks is slated for exclusion from the F&O segment, with effect from August 1, 2025. This cohort includes Aarti Industries, Birlasoft, Hindustan Copper, Mahanagar Gas, and Piramal Enterprises.

For both waves of exclusions, it is important to note the status of existing contracts. Unexpired contracts for current and near-term expiry months (e.g., March, April, and May 2025 for the June exclusions, and May, June, and July 2025 for the August exclusions) will continue to be available for trading until their respective expiry dates. Furthermore, new strike prices will continue to be introduced in these existing contract months to facilitate the management of ongoing positions.

The identification of two distinct groups of stocks with different exclusion dates (June 2025 and August 2025), all stemming from the same underlying regulatory directive (SEBI's August 2024 circular), indicates that SEBI and NSE are engaged in continuous monitoring rather than a singular cleanup operation. This phased implementation suggests a dynamic and ongoing regulatory enforcement mechanism. It implies that stocks are removed as they consistently fail to meet the revised criteria for the stipulated three consecutive months, leaving open the possibility of further exclusions should other securities subsequently fall short of the elevated standards.

Interestingly, the market's immediate reaction to the announcement of F&O exclusion for some stocks presented an unexpected dynamic. Following the March 20, 2025, circular, stocks like MRF, Ramco Cements, Apollo Tyres, Escorts Kubota, and Deepak Nitrite experienced a surge in their prices. This movement is counter-intuitive, as F&O exclusion typically suggests reduced liquidity and speculative interest. However, such a surge could indicate that market participants perceive the removal of speculative overhang as a positive development for the underlying cash market, potentially leading to a re-rating based on fundamental valuations. Alternatively, it might reflect short-term demand from participants closing out existing positions. This nuanced market behavior highlights that F&O exclusion is not universally interpreted as a negative catalyst and can, in specific contexts, lead to unanticipated positive price movements in the short term.

Table 1: List of Excluded Stocks and Their Effective Exclusion Dates

Stock Name

Symbol

Date of NSE Circular Announcing Exclusion

Effective Exclusion Date (for new contracts)

Apollo Tyres Ltd.

APOLLOTYRE

March 20, 2025

June 2025 series (after May 27, 2025 expiry)

Deepak Nitrite Ltd.

DEEPAKNTR

March 20, 2025

June 2025 series (after May 27, 2025 expiry)

Escorts Kubota Ltd.

ESCORTS

March 20, 2025

June 2025 series (after May 27, 2025 expiry)

MRF Ltd.

MRF

March 20, 2025

June 2025 series (after May 27, 2025 expiry)

The Ramco Cements Ltd.

RAMCOCEM

March 20, 2025

June 2025 series (after May 27, 2025 expiry)

Aarti Industries Ltd.

AARTIIND

May 22, 2025

August 1, 2025

Birlasoft Ltd.

BIRLASOFT

May 22, 2025

August 1, 2025

Hindustan Copper Ltd.

HINDCOPPER

May 22, 2025

August 1, 2025

Mahanagar Gas Ltd.

MGL

May 22, 2025

August 1, 2025

Piramal Enterprises Ltd.

PEL

May 22, 2025

August 1, 2025

III. The Core Reason: SEBI's Enhanced Eligibility Criteria

The fundamental reason underpinning these exclusions is the implementation of significantly stricter eligibility norms for stocks in the derivatives segment, as mandated by the Securities and Exchange Board of India (SEBI). These revised guidelines were introduced through a SEBI circular dated August 2024, marking a pivotal shift in the regulatory landscape for equity derivatives.

SEBI's objective behind these enhanced criteria is multifaceted. The regulator aims to foster greater liquidity and efficiency within the F&O segment by ensuring that only sufficiently liquid and actively traded stocks remain. This promotes more accurate price discovery and reduces the potential for market distortions. Furthermore, a key goal is to curb excessive speculation and mitigate the scope for price manipulation, particularly in less liquid securities that might be more susceptible to such activities. Ultimately, these measures are designed to strengthen the overall quality and robustness of the derivatives market by filtering out stocks that do not meet rigorous standards of market depth and trading volume, thereby enhancing market integrity.

The SEBI circular introduced substantial increases in the thresholds for several key quantitative metrics that determine a stock's eligibility for F&O trading. Stocks must consistently meet these revised standards to maintain their presence in the segment.

One critical criterion is the Median Quarter Sigma Order Size (MQSOS). This metric assesses market depth and the ease with which a stock can be traded without significantly impacting its price. SEBI drastically raised the MQSOS requirement from ₹25 lakh to ₹75 lakh. This threefold increase ensures that only stocks with substantial order book depth, capable of absorbing large orders without undue price volatility, qualify for derivatives trading.

Another significant adjustment was made to the Minimum Market Wide Position Limit (MWPL). The MWPL represents the maximum open interest allowed for a stock across all derivatives contracts. SEBI increased this minimum threshold from ₹500 crore to ₹1,500 crore, a threefold rise. This higher limit aims to restrict speculative positions to stocks that can support larger open interest without disproportionate risk, thereby promoting market stability.

Lastly, the Average Daily Delivery Value (ADDV) criterion was substantially raised. This metric indicates the average value of shares that are physically delivered (taken for possession rather than squared off intraday) over a specified period. The minimum ADDV was hiked from ₹10 crore to ₹35 crore. This significant increase ensures that stocks in the F&O segment demonstrate genuine investor interest leading to physical settlement, rather than being dominated purely by speculative, non-delivery-based trading.

A crucial aspect of SEBI's framework is the "three-month continuous failure" rule. A stock is removed from the derivatives segment if it fails to meet these revised eligibility criteria for a continuous period of three months. This rule applies to the stock's performance based on the cash market across all exchanges. While a stock remains eligible if it qualifies on even one exchange, the primary trigger for removal is a sustained failure to meet the standards across all exchanges.

The sheer magnitude of the increases in all three key eligibility criteria—a threefold jump for MQSOS and MWPL, and a 3.5-fold increase for ADDV—is not a minor regulatory adjustment. Instead, it represents a clear redefinition of what constitutes a "suitable" stock for derivatives trading. This substantial elevation of the bar ensures that only the most liquid, robust, and least manipulation-prone stocks remain in the F&O segment. This shift indicates that SEBI is prioritizing market quality and investor protection over broad accessibility to derivatives trading for all listed securities, proactively addressing potential systemic risks that could arise from derivatives trading on illiquid or thinly traded stocks.

The requirement for "three months of continuous failure" before exclusion is a critical detail in SEBI's enforcement mechanism. This grace period suggests a measured and non-arbitrary approach by the regulator. It ensures that a stock is not immediately removed due to temporary market fluctuations or short-term underperformance. Instead, the exclusion is based on a sustained lack of adherence to the liquidity and market depth standards, pointing to a more structural issue with the stock's suitability for derivatives trading. This also provides companies and market participants with a window to observe and potentially adapt, though for these excluded stocks, it implies a persistent inability to meet the higher standards.

Table 2: Comparison of Old vs. New SEBI F&O Eligibility Criteria

Criterion

Old Threshold (₹)

New Threshold (₹)

Percentage Increase

Median Quarter Sigma Order Size (MQSOS)

25 lakh

75 lakh

200%

Minimum Market Wide Position Limit (MWPL)

500 crore

1,500 crore

200%

Average Daily Delivery Value (ADDV)

10 crore

35 crore

250%

IV. Broader Regulatory Context: SEBI's Vision for Derivatives Market

The exclusion of these stocks is not an isolated event but rather a component of SEBI's broader, comprehensive overhaul of the equity derivatives market. The regulator's overarching goals include strengthening risk controls, improving alignment between the derivatives and cash markets, and ensuring fair and orderly participation for all market participants. This holistic approach aims to create a more transparent, tightly supervised, and efficient market ecosystem.

Beyond the specific entry and exit criteria for individual stocks, SEBI has introduced several other significant reforms to achieve its broader objectives. These include:

Recalibration of Market Wide Position Limit (MWPL): SEBI has introduced a new dual benchmark for MWPL, distinct from the minimum MWPL for stock eligibility. This revised structure is based on the lower of 15% of free float or 65 times the average daily delivery value (ADDV), with a minimum floor of 10% of free float. This aims to make position limits more reflective of actual trading activity and to reduce instances of unwarranted F&O bans.

Delta-Adjusted Open Interest Calculation: SEBI has refined how open interest is calculated, moving from simply counting notional positions to a Delta-adjusted Future Equivalent (FutEq) approach. This provides a more accurate and risk-sensitive measure of market exposure.

Enhanced Surveillance and Risk Monitoring: Exchanges are now mandated to monitor MWPL usage intraday at least four random times per session. This real-time surveillance helps detect sudden build-ups in positions and can trigger early warning systems, including additional surveillance margins or scrutiny of participant-level concentration.

Increased Position Limits in Index Derivatives: Limits for index options and futures have been increased, aiming to strike a balance between allowing market participants to take meaningful positions in large indices and preventing manipulation risks. For instance, the net end-of-day FutEq position for index options is capped at ₹1,500 crore, while gross long and short positions cannot exceed ₹10,000 crore each.

Introduction of Pre-Open Session: A pre-open session in the derivatives market, aligned with the cash market structure, has been introduced. This will initially cover current-month futures and extend to next-month contracts during the rollover week, supporting better price discovery and transition between expiries.

Tighter Eligibility for Non-Benchmark Indices: Stricter criteria for launching derivatives on non-benchmark indices have been put in place, including requirements for a minimum number of constituents and caps on the weight of top stocks, to prevent index manipulation.

These broader changes are being phased in between July and December 2025, allowing market participants and infrastructure providers sufficient time to adjust their systems and procedures.

The fact that these specific stock exclusions are occurring concurrently with a wide array of other significant reforms in the derivatives market indicates that the delistings are not isolated incidents. Instead, they are a direct manifestation of a comprehensive, strategic shift in SEBI's regulatory philosophy. This shift is clearly directed towards cultivating a more controlled, transparent, and risk-averse derivatives market that is more closely aligned with the underlying cash market fundamentals. The exclusions serve as a clear signal of SEBI's unwavering commitment to enforcing these higher standards across the board, demonstrating its resolve to curb excessive speculation and enhance systemic stability. Understanding this broader regulatory context is crucial for market participants to grasp the long-term direction of Indian capital markets regulation.

V. Implications and Future Outlook

The exclusion of stocks from the F&O segment carries several implications for both the affected securities and market participants. For the excluded stocks, trading will be limited to the cash market once existing F&O contracts expire. This transition is likely to lead to reduced liquidity and potentially higher bid-ask spreads in the cash market, as the speculative interest and arbitrage opportunities typically associated with derivatives trading diminish. The absence of F&O contracts might also result in reduced overall trading volumes for these specific securities, potentially impacting their price discovery mechanisms.

The path for re-entry into the F&O segment for excluded stocks is stringent. Once a stock is removed, it cannot be reconsidered for re-inclusion for a period of one year from its last date of trading in that segment. Following this one-year ban, a stock may only be reintroduced if it consistently meets SEBI's new, higher eligibility norms for a continuous period of six months, and this re-inclusion remains subject to SEBI's final approval.

The stringent re-entry rules underscore SEBI's commitment to maintaining exceptionally high standards within the F&O segment. The requirement for a full year of exclusion, followed by six consecutive months of meeting the elevated eligibility criteria, is a powerful signal. It demonstrates that SEBI's decision to exclude stocks is not a temporary punitive measure but a fundamental re-evaluation of their suitability for derivatives trading. The arduous nature of the re-entry path reinforces the regulator's dedication to preserving a high-quality F&O segment and strongly discourages companies from falling below the established standards, given the significant effort required to regain eligibility. This implies that the impact on excluded companies is substantial and potentially long-lasting, which may influence their corporate governance and market engagement strategies in an effort to eventually regain F&O eligibility.

The overall impact on market participants will necessitate adaptation. Derivatives traders who have relied on these specific stocks for F&O strategies will need to adjust their approaches, either by shifting their focus to other eligible securities or by concentrating solely on cash market trading for the excluded stocks. Conversely, long-term investors might view the increased regulatory scrutiny positively. The measures aim to reduce volatility and manipulation, potentially leading to a more stable and fundamentally driven investment environment, which can be beneficial for long-term capital appreciation.

SEBI's actions highlight a clear regulatory trade-off: by increasing the eligibility thresholds so dramatically, the regulator is implicitly reducing the number of stocks available for derivatives trading. This limits accessibility for some market participants who might prefer to trade F&O on a wider range of securities. However, this limitation is deemed necessary to achieve the greater objective of enhanced market integrity, reduced manipulation, and systemic stability. The long-term implication is a derivatives market that, while perhaps smaller in terms of underlying assets, is significantly more robust and reliable. This strategic choice by SEBI to prioritize quality over quantity in the F&O segment is expected to benefit overall market health and investor confidence.

While the exclusions may cause short-term adjustments and require adaptation from market participants, the long-term benefits of SEBI's stricter approach are expected to be substantial. A derivatives segment comprising only highly liquid and robust stocks will be less susceptible to manipulation and excessive speculation. This fosters greater market integrity and investor confidence, ultimately contributing to a healthier and more sustainable capital market ecosystem. The reforms aim to strengthen the overall market structure in the long run, creating a derivatives market that is more transparent, tightly supervised, and better aligned with the real economy, without curbing genuine risk management or price discovery.

VI. Conclusion

The exclusion of prominent stocks such as MRF, Apollo Tyres, Piramal Enterprises, and others from the National Stock Exchange's (NSE) Futures & Options (F&O) segment is a direct consequence of the Securities and Exchange Board of India's (SEBI) revised and significantly stricter eligibility norms. These norms, introduced in August 2024, have drastically raised the bar for liquidity, market depth, and trading volumes required for derivatives inclusion, specifically increasing thresholds for the Median Quarter Sigma Order Size (MQSOS), Minimum Market Wide Position Limit (MWPL), and Average Daily Delivery Value (ADDV).

This regulatory action is not an isolated event but forms an integral part of SEBI's broader strategic vision to cultivate a more transparent, stable, and less speculative equity derivatives market. By continuously monitoring and systematically excluding stocks that fail to meet these elevated standards for three consecutive months, SEBI aims to enhance market integrity, reduce manipulation risks, and foster a healthier trading environment for all participants. While these changes necessitate adaptation from traders and investors, they are fundamentally designed to