The board of Securities and Exchange Board of India (Sebi) on Monday approved sweeping changes with respect to conflict-of-interest rules for its officials to improve transparency, especially among the top management. In addition, it also allowed netting of investments for foreign portfolio investors (FPIs) in the cash market.
Among the key changes on conflict-of-interest rules, the chairman and whole time members’ investments in equity and equity related investments (except for mutual funds and other pooled instruments) have to be liquidated or frozen at the time of joining. They can also sell through a trading plan or sell with prior approval.
Also, new investments in regulated products should not exceed 25% of their financial portfolio. If this limit is breached, the respective party will have to recuse from all matters involving that particular intermediary.
Officials and employees of the regulator are also recommended to make initial, annual, and event-based disclosures of assets, liabilities, trading activities and relationships to the regulator.
All investment restrictions will also be applicable to their spouses and dependent family members. At present, Sebi employees are permitted to invest in mutual funds, but not in stocks. However, no such restrictions are in place for their spouses, which will now likely change.
Another recommendation made by the high-level committee is that immovable property details of the chairman, WTMs, executive directors, and chief general managers may be publicly disclosed. This would be in line with the norms applicable to officers under Government of India All India Service and Central Civil Services. There should be a new Office of Ethics and Compliance for managing the conflict of interest framework for employees.
The high-level committee was formed in March 2025 following conflict-of-interest allegations against former Sebi Chairperson Madhabi Puri Buch after the now-defunct US-based short seller Hindenburg Research had alleged that Buch had undisclosed stake in offshore entities, raising concerns about transparency, accountability, and legitimacy of the market regulator.
The new code will now be referred to the central government which will take a final decision on the same.
FPI netting framework
In a relief for foreign portfolio investors (FPIs), Sebi has permitted the netting mechanism in the cash market, enabling them to settle the net value of their transactions rather than gross payments. This is expected to reduce additional liquidity demand of foreign investors – particularly during major events such as index rebalancing days. The mechanism will be implemented on or before December 31.
“…it has been decided to permit net settlement of funds for outright transactions done by FPIs in cash market, that is, transactions in which there is either purchase or sale transactions, but not both, in a security in a settlement cycle,” the notification said.
However, non-outright transactions will continue to be confirmed and settled on a gross basis and concerns relating to potential market influence arising from large FPI positions are allayed. “The request was to bring a general netting, but the problem was that FPIs are not allowed to do day trading,” Sebi Chairman Tuhin Kanta Pandey said at a press conference after the board meeting.
Netting allows FPIs to offset multiple buy-sell transactions in a day and enable a single net amount for settlement. Currently, each buy and sell transaction is settled separately and settlements with custodians are made on a gross basis, resulting in higher fund requirements.
The move comes at a time when FPIs have been dumping Indian equities since the end of September 2024 due to multiple reasons such as expensive valuations, muted earnings growth, US tariff woes, and depreciation of the rupee. What came as a double whammy was the US-Iran war and the consequent volatility on crude oil prices and rupee.
The latest mechanism was one of the various requests from FPIs to the regulator. Earlier, Sebi had eased a series of norms for foreign investors, including reduction in registration timelines, the block deal framework, and the closing auction mechanism.