Key Sebi board meet today: Big decisions likely on derivatives, FPI

PAC has never called SEBI earlier.

The members who constitute the governing body of the Securities and Exchange Board of India (SEBI) are to meet on September 30. It will tracked closely because there are key decisions relating to various market players and intermediaries that could be cleared, including the big one—of strengthening the index derivatives framework.

Once rolled out, this new framework is expected to have a significant impact on the securities market, putting an end to the gambling-like trading behaviour that had taken off with daily expiries of index-derivative contracts. On July 30, SEBI floated a consultation paper that proposed a framework under which there would only be weekly expiries of these derivatives contracts (one index-based weekly contract per stock exchange), the minimum contract value would be increased to Rs 15-20 lakh at launch and then later to Rs 20-30 lakh (to deter retail investors), strike prices would be rationalised, and so on.

Also read: Crucial Sebi board meeting on Sept 30, first since controversy over Chairperson

Since both the finance minister Nirmala Sitharaman and SEBI chief Madhabi Buch have commented on the urgency to act on the trading behaviour in the F&O or futures and options segment and since the submission deadline for public comments was more than a month ago—on August 20—there is a high likelihood that the SEBI board will deliberate on the framework in this meeting.

Another game-changing reform that will be closely tracked will be the launch of the performance validation agency. It has been more than a year since the consultation paper on the setting up of an agency that will authenticate the performance claims of various intermediaries including research analysts (RAs) and regulated algo providers was floated. At an August 2 conference organised by industries body FICCI, the SEBI chief said that the agency will come into being soon. But people close to the developments have said that there are technical difficulties in setting it up. RAs, investment advisors (IAs) and algo traders will be keenly watching the outcome of the Board meeting to see if they will finally have a way of promoting their service more effectively and above the din of unregulated finfluencers.

On June 26, the regulator also proposed harmonisation of regulations on public issues, or the Issue of Capital and Disclosure Requirements Regulations, and listing regulations, or Listing Obligations and Disclosure Requirements Regulations. This is for ease of doing business and covers filings and disclosure procedures and timelines, the appointment process for directors, reclassification of promoters and promoter group entities, placing responsibility on key management personnel to make disclosures that would enable to listed entities to be in compliance with norms, giving more time to make disclosures of material events and so on.

Other possible reforms

1. The regulator may make it easier for foreign portfolio investors (FPIs) to comply with the additional disclosure norms issued through the August 2023 circular. The 2023 circular had asked entities that have concentrated holdings in a corporate group or a high level of exposure to the Indian market to make granular disclosures of entities that own, control or have an interest in the particular FPI. However, in a July 30 consultation paper, the regulator said that FPIs may need to only disclose whether they are a land-bordering country (LBC) FPI or non-LBC FPI based on the location of the majority of the entities that have ownership, control or economic interest in the FPI. It clarified that the granular details would only be needed if the FPI cannot be identified as LBC or non-LBC.

Another change that FPIs may have to absorb is the likely inclusion of offshore derivative instruments (earlier P-notes) and segregated portfolios of FPIs with sub-funds under the additional disclosure framework. In a consultation paper released this August, SEBI said that without their inclusion there is the possibility of regulatory arbitrage.

2. Easier compliance norms for IAs/RAs such as reducing the educational qualification and experience requirements, removal of net-worth requirement and allowing an entity to register both as an IA and RA.

3. Extension of the definition of connected person under insider trading regulations to include a relative of the connected person, those sharing a household with a connected person and a Hindu undivided family, among others.

4. Reintroduction of summary proceedings to make it easier to handle violations by intermediaries, when the violation is apparent. In the consultation paper released on July 16, the regulator proposed this to enhance its ability to respond swiftly to protect the interest of investors.

5. Introduction of a new asset class to be introduced that lies between a portfolio management service and a mutual fund, to allow investors with a higher investable amount to take more risk.

6. Mutual funds may be expecting two changes—one would be the introduction of Mutual Fund Lite Regulations for passively managed funds with less compliance requirement; and two, the mandate to disclose risk-adjusted return in their documents.