Yesterday, around 4 pm, my WhatsApp started pinging with messages about a story that appeared in the Financial Times on Google considering buying a 5 percent stake in Vodafone Idea.

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Now, ever since the Facebook investment in Jio Platforms, there has been talk (or hope) of similar investments in the other telecom companies, which is a reasonable expectation.

However, that is not the topic of my post. I am sure the Financial Times report must have been published after editorial due diligence and there is no reason to question the story. And Google may or may not buy a stake in Vodafone Idea -- we will know that in time. But I am raising a larger question here.

First, some data. The Vodafone Idea stock was in F&O ban yesterday, which happened to be expiry day, and no rollovers were allowed. So obviously there was a lot of action in the cash markets. It traded 50 crore shares and 12.8 crore shares out of those were marked for delivery.

Now since Vodafone Idea is an F&O stock, the concept of a daily circuit limit does not apply to it. However, to reduce the volatility, temporary price freezes -- starting at 10 percent with incremental 5% limits – are applied.

The stock, which closed at Rs 5.8 yesterday, today started at a 10 percent circuit and then kept moving higher in a staircase pattern till it rose about 30 percent.

During this period, there was a massive build-up at the Rs 10 call with a premium of 55 paise.

In other words, despite a 30 percent surge (with the stock trading at a little above Rs 7), traders were willing to bet Rs 50,000 to get the right to buy the stock at Rs 10 later this month – a level that was a good 50 percent away. (Vodafone Idea option lot size stands at 98,000 shares.)

Later in the day, the telco issued a denial that it was talking to Google, and the stock cooled off, closing 13.8 percent higher at Rs 6.6.

Now, the question I am raising is simple but fundamental. Why is Vodafone Idea still in the NSE F&O segment, when the exchange has, over the last 18 months, been on an overdrive to remove stocks to protect retail investors from extreme volatility?

In early 2019, it removed JP Associates and Reliance Communications before embarking on a purge – removing as many as 34 stocks from F&O. The exclusion on some -- like Jet Airways, Jain Irrigation and Suzlon – was warranted but a majority were decent stocks such as Ajanta Pharma, Canfin Homes, Godfrey Phillips, India Cements, Tata Comm and V Guard among others.

Since then, other stocks that have been removed include Tata Elxsi, Hexaware, CESC, Yes Bank, Oil India, NBCC, Tata Motors DVR, Union Bank, Bank of India, Arvind, EIL, Hind Zinc, MCX, Kajaria and Raymond. Next, three more names will be removed: Adani Power, Just Dial and NCC.

How has Vodafone Idea managed to survive this purge? It has been a penny stock for the better part of the last one year. It has witnessed extreme volatility and the lot size has now reached a humongous 98,000 shares. Which means even if you look at a basic spread of 5 paise, just the cost of buying and selling 1 lot would cost close to Rs 5,000.

The exchange has a laid-out criterion for excluding a stock from F&O: “For an existing F&O stock, the continued eligibility criteria is that market-wide position limit in the stock shall not be less than Rs 60 crore and the stock’s median quarter-sigma order size over the last six months shall be not less than Rs 2 lakh. The stock shall be excluded if the above criteria is not fulfilled for consecutively three months.”

Has the time come for the exchange to expand this criterion to remove a stock when its price moves all over the place? I think the answer is yes.

First Published:May 29, 2020 5:10 PM IST