Mumbai, July 17 -- A senior official at India's markets regulator has raised red flags over the surge in short-term equity derivatives trading, particularly expiry-day index options, warning that the current structure may be unsustainable and detrimental to long-term capital formation.

The Securities and Exchange Board of India (Sebi) has been closely tracking the exponential rise in such activity, which has been accompanied by significant losses for retail investors. At the 11th Capital Markets Conclave of Confederation of Indian Industry (CII) in Kolkata on Thursday, Sebi's whole-time member Ananth Narayan G said the regulator is focused on balancing innovation with investor protection.

"There is no question that derivatives and indee...