The Securities and Exchange Board of India (Sebi) board meeting on December 17 – the 212th – will discuss several reforms, majority of them linked to equity brokerages. It will review mutual funds’ rules, create more ease for foreign portfolio investors (FPIs), improve the stock lending and borrowing (SLB) mechanism, and review the recently submitted report of the high-level committee on conflict of interest.
Modernising Market Mechanisms
The Sebi board is likely to discuss an improvement to 1992 stock broker regulations (SBR) to define ‘algorithmic trading’ that lacked explicit codification. This will align regulations with modern technology and global market practices, while providing clarity for brokers. Sebi is on path to modernize the stock lending and borrowing (SLB) mechanism, to make it efficient, accessible, said market experts.
SLB transactions are exchange-based, while globally they are over-the-counter (OTC) trades. It will deepen market liquidity and create a robust structure for short-selling.
“At present there are not too many long-short strategy in India. Such strategies often comes with greater scrutiny on firms, and is goof for market integrity, as fund managers look to profit from downward price movements,” said the investment strategist at a mutual fund.
Structural Reforms
Sebi will look at sweeping changes to mutual fund fee rules with changes to the Total Expense Ratio (TER) and updated limits on brokerage charges. A draft on this had a sharp impact on the stocks of asset managers, brokerages and distributors. The proactive changes in the commission structure of Mutual Funds are a big concern for a large number of small distributors, said market experts.
“Regulatory interventions in commercial operations may be considered as high risk for the future of MF industry,” said the chairman of a brokerage-distributor. This was reiterated by other experts, who argued that the regulator, in the absence of proof that competition is not working, should not be setting rates.
Last week, Sebi said MFDs could gain to Rs 2,000 for bringing in new individual investors from B-30 (beyond the top 30) cities and new women investors from both T-30 (top 30) and B-30 cities.
It is also likely to hold-back some key reforms on the tenure of derivative maturities. Weekly options expiry provision cannot just be shut down as there are many market participants that use these instruments, Chairman Tuhin Kanta Pandey had said. They were to be introduced for retail investor protection from excessive speculation. After deep cuts in brokerages and bourses stocks, Sebi said future adjustments are to emerge from deep consultations.
The brokerage industry’s margin trading facility (MTF) books too have risen to nearly ₹1 trillion, absorbing much of the leverage demand from a drop in derivatives trading. After a successful listing in November, the market value of the largest brokerage, Groww, surged beyond Rs 1 lakh crore before a pull-back.
The Sebi board will also review a report from a high-level six-member team (HLC) on internal conflict-of-interests at Sebi. The report’s recommendations include greater transparency. Sebi is likely to implement a two-year restriction on post-retirement assignments for its senior officials.
After stern advise on significant risk to investors from unregulated digital gold products, the regulator may take steps on such products, said experts. In an important statement, chairperson Tuhin Kanta Pandey said in November that Sebi will review the Listing Obligations and Disclosure Requirements (LODR). “We will have lots of consultation. It will take some time,” he said.
Sebi is likely to further ease business for FPIs after the launch of the ‘India Market Access’ website, a single-window digital platform.
It plans to attract greater FPI participation and align domestic regulations with international benchmarks. It is studying financial netting for FPIs. A key global organization of asset managers, International Corporate Governance Network (ICGN) last week told FE it is looking to collaborate with Sebi to facilitate greater inflows to equities.
