The introduction of equity derivatives in India was to provide hedging facilities to the market participants. Today, they have become an integral part of the Indian Capital Market. There is an immediate need to recognize the principles of hedge accounting in the accounting of derivatives contracts. The increasing volume in this market also calls for introduction of such accounting principles at the earliest.
Trading in equity derivatives started in the year 2000 in India with the introduction of stock index futures contracts based on the BSE Sensex and NSE Nifty. Going a step further, stock index options and individual stock options were allowed in the year 2001. Introduction of these options has given the required strength to the equity derivatives market in India. Finally, the need for stock futures was also felt. This was more so after the abolition of carry forward and badla system which had become synonymous with the Indian Stock market. Trading in stock futures started in November, 2001 and from then till date, the volume in equity derivatives has surged substantially. The derivatives volume has been more than double of cash market volume on most of the trading days. Within three years, equity derivatives have become an integral part of the Indian capital market. The growing volume and large participation in these instruments have silenced the critics who initially opposed the introduction of the equity derivatives in India.
The official purpose of introduction of equity derivatives in India was to provide hedging facility to various participants. A major part of transactions in equity derivatives may be with an intention to speculate or arbitrage but a large number of such contracts are undertaken to hedge against the existing position. With the daily volume of more than Rs. 10,000 cr in equity derivatives market, the transactions undertaken for the purpose of hedging is bound to be quite substantial. Having understood the nuances of buying and selling in derivatives market, what is really important is to know the kind of accounting treatment to be given to such transactions and also the incidence of taxation on them. Unfortunately, the growth in the equity derivatives market is not reflected. The absence of any appropriate and clear guidelines and rules in these areas has created confusion and hardship to market participants.
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