I feel that it is a blunder to allow stock options in India at this juncture. Stock options look simple and innocuous but are fraught with dangers in our conditions. The people or the interest groups who are clamouring for stock options are business houses and market operators. Stock options will provide them a new handle for manipulating share prices. This is because options are themselves derived from the cash market.
Improvements are, no doubt, needed in many institutional arrangements.
In my opinion, the most important institutional arrangement needed to facilitate the transition relates to bank financing of stock market activities. This is a new experience for Indian banks. We need to evolve a sound system of margin trading. My suggestion is that the minimum margin against shares should be prescribed by RBI and not be left to the discretion of individual banks. For the margin system to be effective, it should be collected upfront from every individual investors.