Maarg Manthan · Topic 17.11

L.C. Gupta Committee on Financial Derivatives

Current Affairs & Government Schemes › Key Government Committees and Commissions · Topic 17.11

The L.C. Gupta Committee on Derivatives was set up by the Securities and Exchange Board of India (SEBI) in November 1996 under Dr L.C. Gupta to draw up a regulatory framework for derivatives trading in India, and it submitted its report in December 1997. It recommended introducing derivatives in stages, starting with stock index futures, and a regulatory system with risk-based margins, a clearing corporation and a minimum contract size. The Securities Laws (Amendment) Act, 1999 amended the Securities Contracts (Regulation) Act, 1956 to legalise derivatives, and index futures began on BSE and NSE in June 2000.

5 min read · UPSC Prelims · Current Affairs & Government Schemes · Key Government Committees and Commissions

At a Glance

Set up by SEBI, November 1996
Chair Dr L.C. Gupta
Report December 1997
Law change SCRA amended, 1999
First product Index futures, June 2000
Exam link UPSC Prelims, Current Affairs and Government Schemes: Key Government Committees and Commissions

Where Does It Fit?

This topic continues the series on older committees. After insurance, it shows how capital market reform was designed, and it leads to the microfinance and monetary policy committees that follow. Previous topic: R.N. Malhotra Committee on Insurance Sector Reforms. Next topic: Y.H. Malegam Committee on Microfinance Institutions and NBFC Regulation.

Area	Recommendation
Introduction	Derivatives should be introduced in phases, with stock index futures first, followed by index options and options and futures on individual stocks
Legal base	Derivatives should be declared as securities under the Securities Contracts (Regulation) Act, 1956 so that SEBI could regulate them
Trading venue	Derivatives should trade on a separate segment of a recognised stock exchange, under a governing council
Clearing	A clearing corporation or clearing house should guarantee settlement of trades, with strong risk management
Margins	Risk-based initial margins and daily mark-to-market margins should be collected from members and clients
Contract size	A minimum contract value of Rs 2 lakh should apply, so that small investors were kept away from high risk

How Did Derivatives Trading Develop in India?

Legal change: The Securities Laws (Amendment) Act, 1999 inserted derivatives into the definition of securities under the SCRA, which removed legal doubts
SEBI approval: SEBI approved derivatives trading in 2000 at both the Bombay Stock Exchange and the National Stock Exchange
First contracts: Index futures started in June 2000 on the BSE and the NSE
Next steps: Index options came in June 2001, stock options in July 2001, and stock futures in November 2001
Clearing: The National Securities Clearing Corporation and the Indian Clearing Corporation became the central counterparties for derivative trades
Later regulator work: The J.R. Varma Committee on risk containment measures complemented the Gupta report
Currency derivatives: Currency futures began in August 2008 and interest rate futures later, regulated by both SEBI and the RBI
Commodity derivatives: After the merger of the Forward Markets Commission with SEBI in 2015, commodity derivatives also came under SEBI

What Else Should You Remember?

SEBI: The Securities and Exchange Board of India was set up as a non-statutory body in 1988 and got statutory status through the SEBI Act, 1992, and it is the regulator of the securities market
Instrument basics: A derivative is a contract whose value comes from an underlying asset such as an index, a stock, a currency or a commodity
Futures and options: A futures contract obliges both sides to trade at a set price on a date, while an option gives the buyer a right and not an obligation
Hedging versus speculation: The Committee saw derivatives mainly as a tool for hedging price risk, but they are also used for speculation
Recent SEBI curbs: In October 2024 SEBI announced measures for index options, including one weekly expiry per exchange, upfront collection of premium and a higher contract size, after a study showing that most individual traders lost money, as reported
Retail participation: The SEBI study found that a large majority of individual traders in equity futures and options made losses over several years
Global comparison: India has one of the largest derivatives markets by number of contracts traded, led by index options on the NSE
Link to committees: The Gupta report is an example of how a regulator tests a market design through a committee, as in Reserve Bank of India Committees (Monetary Policy, Digital Lending, etc.)
Risks: Leverage, high retail losses, systemic risk and concentration in weekly expiries
Verification note: SEBI rules on derivatives change often, so the latest circulars should be checked for current lot sizes and expiry rules

Why Does It Matter for the Exam?

Who and when: SEBI committee, L.C. Gupta, 1996 to 1997
Law: SCRA 1956 amended in 1999
First product: Index futures in June 2000
Regulator: SEBI for securities and commodity derivatives
Common errors: Saying RBI set up the committee or that options came before futures

As an analytical point, derivatives deepen markets and help hedge risk, but they also invite excess speculation by small investors. Sound rules on contract size, margin and investor education reduce the harm while keeping the benefits.

Why Is This Topic Important?

Committee Who set it up
Dates 1999 and 2000
Current affairs F&O curbs

What Came Next?

The next topic covers the committee on microfinance and NBFC regulation. Next topic: Y.H. Malegam Committee on Microfinance Institutions and NBFC Regulation.

Key People and Terms

Derivative Contract linked to an asset
SCRA Securities Contracts (Regulation) Act
Margin Deposit to cover risk
Clearing corporation Guarantor of trades
Hedging Reducing price risk
F&O Futures and options

Exam Corner

Points to Remember

Set up by SEBI, 1996.
Report: December 1997.
Act amended: 1999.
Index futures: June 2000.
Minimum contract: Rs 2 lakh proposed.

Do Not Confuse With

Gupta Committee and Varma Committee Derivatives framework versus risk containment
SEBI and RBI Securities regulator versus central bank
Futures and options Obligation versus right

Memory Hook

Gupta said futures first, SCRA made them legal, June 2000 began the trade.

Mains Angle

Mains questions ask about retail losses in derivatives and regulation. These points give a balanced frame.

Benefit Hedging and depth
Risk Retail losses
Way Contract size, education

A Question You May Face

An original practice question, not a past paper question.

“Explain the role of the L.C. Gupta Committee in the growth of derivatives in India and discuss the regulatory challenges that have arisen.”

How to Answer

Report Phased entry.
Law SCRA change.
Issue Retail losses.
Way Safeguards.

GS Relevance

Prelims: Gupta Committee, SCRA amendment, first derivative products, SEBI role. GS Paper 3: capital markets, financial sector regulation.

Frequently Asked Questions

What is the L.C. Gupta Committee on derivatives?

It is a committee set up by SEBI in November 1996 under Dr L.C. Gupta to prepare a regulatory framework for derivatives trading. Its December 1997 report suggested phased introduction, a clearing corporation, risk-based margins and legal changes, and led to the start of index futures in India in June 2000.

Who set up the L.C. Gupta Committee?

The Securities and Exchange Board of India set up the L.C. Gupta Committee in November 1996. It was not a committee of the Reserve Bank of India or of the Ministry of Finance. SEBI used the report to frame rules for derivative trading on stock exchanges.

Which law was changed after the Gupta report?

The Securities Contracts (Regulation) Act, 1956 was amended through the Securities Laws (Amendment) Act, 1999 to include derivatives in the definition of securities. This gave SEBI clear powers to regulate derivatives and removed the legal doubt over such contracts being treated as wagers.

When did derivatives trading begin in India?

Derivatives trading began in June 2000 with index futures on the Bombay Stock Exchange and the National Stock Exchange. Index options started in June 2001, stock options in July 2001 and stock futures in November 2001, following the phased approach recommended by the Gupta Committee.

What is the latest regulatory action on futures and options trading?

In October 2024 SEBI announced steps to curb speculative trading in index options, including limiting weekly expiries to one per exchange, collecting option premium upfront and raising the contract size, as reported. The measures followed a SEBI study that found most individual traders lost money.

PYQ Practice — Statement Analysis

1 The L.C. Gupta Committee was set up by the RBI.

False

It was set up by SEBI.

2 Index futures were the first derivative product in India.

True

They began in June 2000.

3 The SCRA was amended in 1999 to cover derivatives.