L. C. Gupta Committee

Before 2000 India had no exchange-traded derivatives. The L. C. Gupta Committee is where the framework for them came from.

SEBI set up a 24-member committee under the chairmanship of Dr. L. C. Gupta on 18 November 1996 to develop an appropriate regulatory framework for derivatives trading in India. It submitted its report on 17 March 1998, recommending that derivatives should be declared "securities", so that the regulatory framework applicable to trading of securities could also govern trading of derivatives.

On 11 May 1998, SEBI accepted the recommendations and approved the phased introduction of derivatives trading beginning with stock index futures.

Its companion was the J. R. Varma group, set up in June 1998, which worked out risk containment — margining, initial margin methodology, membership and net worth details, deposits and real-time monitoring of positions.

From report to trading (Chapter 1, section 1.3):

The framework (Chapter 8, section 8.3):

• An exchange meeting the committee's eligibility criteria can apply to SEBI for recognition under Section 4 of the SCRA to trade derivatives.
• The derivatives exchange or segment needs a separate governing council; trading/clearing members may be at most 40% of it.
• The exchange must regulate members' sales practices and get prior SEBI approval before trading any derivative contract.
• Minimum 50 members.
• Members of an existing segment do not automatically become derivatives segment members.
• Clearing and settlement through a SEBI-approved clearing corporation.
• Derivatives brokers/dealers and clearing members must register with SEBI, in addition to existing broker registration. Minimum clearing member net worth Rs 300 lakh.
• Minimum contract value not less than Rs 5,00,000.
• Strict Know Your Customer; every client registered with the derivatives broker; a signed Risk Disclosure Document.
• Trading members need qualified approved users and sales persons certified under a SEBI-approved programme.

Net worth under the committee's method (illustrative broker). The workbook computes net worth as capital plus free reserves, less non-allowable assets. A firm applying to be a clearing member shows:

At Rs 340 lakh the firm clears the Rs 300 lakh minimum. Had its fixed assets been Rs 90 lakh instead of Rs 40 lakh, net worth would be Rs 290 lakh — and it would not qualify.

The 40% cap (illustrative). A derivatives segment with a 10-member governing council may have at most 10 × 40% = 4 trading/clearing members on it.

A stale figure. The committee's minimum contract value was Rs 5,00,000. The workbook itself notes that, effective 20 November 2024, SEBI prescribed contract values of Rs 15 to 20 lakh. A Nifty futures contract of 65 × 25,006.60 = Rs 16,25,429 meets both.

Chapter 1, section 1.3 (Indian Derivatives Market), gives the committee's formation, report date and core recommendation, and the J. R. Varma group that followed. Chapter 8, section 8.3 (Regulations in Trading), sets out the framework drawn from the committee's report — governing council, 50 members, SEBI-approved clearing corporation, net worth, contract value, KYC and the Risk Disclosure Document. Expect date questions, "what did the committee recommend", and the 40% / 50 members / Rs 300 lakh figures.

• L. C. Gupta = regulatory framework (1996–98). J. R. Varma = risk containment and margining (1998).
• The committee recommended that derivatives be declared securities; the SCRA amendment came later, in 1999.
• Phased introduction began with stock index futures, not options and not single stock futures.
• Existing exchange members do not automatically become derivatives segment members.
• Trading/clearing members: at most 40% of the derivatives segment governing council.
• Stale: the Rs 5 lakh minimum contract value has been superseded by Rs 15–20 lakh from 20 November 2024.
• The committee had 24 members; the exchange needs a minimum of 50 members.