What Are the Latest Changes in Stock Market Regulations by SEBI?

The Securities and Exchange Board of India (Sebi) has announced several significant regulatory changes aimed at refining the stock market ecosystem, enhancing investor protection, and curbing market manipulation.

Let's have a look at the details of these changes and their implications for various market participants.

How Will the New Criteria for Derivatives Selection Affect the Market?

SEBI has revised the selection criteria for stocks to be included in the derivatives segment. This move is intended to create a stronger connection between the cash market and the futures and options (F&O) market.

"In order to ensure that there is a healthy linkage between the cash market and the futures and options market, we need to adjust those parameters," said SEBI Chairperson Madhabi Puri Buch. This decision aims to foster a vibrant securities market with appropriate regulation and investor protection.

The new criteria will be applied to stocks that have been in the derivatives segment for at least six months. Existing stocks will be evaluated based on performance, with the new criteria taking effect six months after the relevant circular is issued. This revision is in response to increased cash market turnover, delivery volumes, and volatility over the past six years. By preventing stocks with low liquidity and high volatility from entering the F&O segment, Sebi hopes to curb the manipulation of cash shares through derivatives.

Also Read: Investing in the Stock Market: Get Your Fundamentals Cleared First

What Restrictions Are Imposed on Financial Influencers?

In an effort to protect retail investors from potentially harmful financial advice, Sebi has banned regulated entities such as mutual funds and brokers from engaging with so-called financial influencers.

"The decision was taken to address concerns related to certain persons, including unregulated entities, inducing investors to deal in securities based on inappropriate claims," Sebi stated in a press release.

However, financial influencers focused on investor education are exempt from these new restrictions. Regulated entities are responsible for ensuring that individuals they associate with do not breach Sebi's rules, including avoiding promises of assured returns.

Also Read: Money Masterclass: Profiting from Indian Defense Stocks!

How Will the New Product Success Framework Impact Single-Stock Derivatives?

Sebi has introduced a product success framework for single-stock derivatives to ensure market liquidity and participation. This framework will be effective six months from the issuance of the circular.

“The idea is to introduce the concept of a product success framework, which means that exchanges can introduce a new index for F&O, and if the volume does not pick up or if it is not a success, it would be removed,” explained Buch.

This measure aims to prevent manipulation in contracts with thin volumes, ensuring that only those with adequate liquidity remain in the market.

Also Read: Investing in Fintech: How to Cash in on Indian Fintech Stocks?

What Changes Are Made to the Voluntary Delisting Process?

Sebi has eased the voluntary delisting process by introducing a fixed price mechanism as an alternative to reverse book building (RBB) for frequently traded shares. The fixed price offered must be at least a 15% premium over the floor price as determined under Delisting Regulations. Additionally, the threshold for making a counter-offer in the RBB process has been reduced from 90% to 75%, provided at least 50% of the public shareholding has been tendered.

“The counter-offer price shall not be less than the higher of the Volume Weighted Average Price (VWAP) of the shares tendered/offered under the RBB process, and indicative price, if any, offered by the acquirer," Sebi said in a release. 

The delisting will be considered successful only when the post-offer aggregate shareholding of the acquirer reaches 90%.

How Will the New Fee Collection Mechanism Benefit Investors?

Sebi has approved a proposal for an optional fee collection mechanism for registered investment advisors (IAs) and research analysts (RAs). This mechanism is designed to create trust in the ecosystem by ensuring that investors make payments only to registered IAs and RAs. This differentiation will help investors distinguish between registered and unregistered entities acting as IAs and RAs.

“The mechanism shall facilitate investors for availing the services and making the payment of fees only to registered IAs and RAs, thus creating trust in the ecosystem,” Sebi stated.

What Are the Implications for Alternative Investment Funds (AIFs)?

Sebi has also introduced changes for alternative investment funds (AIFs). The regulator has approved a proposal to limit the extension of a large-value fund's tenure to five years, subject to approval from the majority of unit holders. Additionally, AIFs are now permitted to borrow for up to 30 days to meet temporary shortfalls in drawdowns.

How Will the New Cybersecurity and Data Localization Regulations Affect the Market?

Sebi has mandated data classification and localization for its regulated entities to ensure robust security controls for regulatory data. Additionally, a comprehensive cybersecurity and cyber-resilience framework has been approved. These measures aim to bolster the security and resilience of market infrastructure institutions.

These regulatory changes by Sebi are aimed at refining the stock market ecosystem, enhancing investor protection, and ensuring market integrity. By adjusting the criteria for derivatives, curbing the influence of financial influencers, introducing a product success framework, and easing the delisting process, Sebi is taking significant steps to safeguard the interests of retail investors and maintain a vibrant securities market.

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