India's market regulator plans major reforms to attract foreign investors
India's top financial watchdog, SEBI, led by chairman Tuhin Kanta Pandey, is working to attract overseas investors back to the Indian stock market by easing regulations, lowering trading fees, and simplifying processes like registration. This comes as foreign investors have pulled $17 billion from Indian stocks in 2023. SEBI is reviewing rules to boost stock market activity, addressing concerns over high transaction costs, shallow borrowing and lending markets, and excessive derivatives trading among retail investors. Changes include faster registration, revisiting short-selling rules, and potential 'netting' to ease trade funding. These efforts aim to rebuild investor confidence amidst economic challenges and US trade tariffs.
Introduction: Reviving Overseas Investments
India’s top financial watchdog announced plans on Wednesday to bring foreign investors back to the stock market. Key measures include:
- Cutting red tape
- Lowering trading fees
- Simplifying share borrowing
Tuhin Kanta Pandey, who became chairman of the Securities and Exchange Board of India (SEBI) in March, is leading this initiative. His approach aims to make regulations more investor-friendly, marking a significant departure from stricter policies followed by his predecessors.
Addressing Declining Foreign Investments
India has seen foreign money managers pull out nearly $17 billion from its stock market this year. This comes at a time when the economy is already under strain due to high US tariffs on Indian exports.
Pandey emphasized the long registration process for foreign investors as a key bottleneck. He stated:
“In my interactions with foreign participants, both in India and abroad, I got the feeling that the number one issue is that our registration process still takes too long. It is unacceptable.”
Efforts are underway to shorten the registration process to just a few days, rather than a month.
Boosting Activity in Stock Markets
SEBI is reviewing key regulations to improve stock market activity. This includes examining:
- Deposit requirements for buying and selling shares
- Increasing liquidity in cash markets
Pandey highlighted the need for decisions around margins but gave no specific details:
“While the liquidity in cash markets has improved in the last few years, we want it to improve further.”
Rising Dominance of Derivatives
India’s derivatives market has expanded massively, growing to over 300 times the size of the regular stock market. However, futures and options trading among retail investors have raised concerns about risky bets.
SEBI is enforcing ‘product suitability’ rules to temper retail investors’ exuberance:
“There is irrational exuberance among some players whom we consider not adequately informed about the risks,” said Pandey.
The regulator wants to assess the impact of recent changes before introducing new measures, aiming for a stable approach.
Strengthening Short-Selling and Share Lending
SEBI is also reviewing rules related to short-selling and the borrowing and lending of shares. Pandey emphasized the need to address high transaction costs, which deter activity in these markets:
“If the transaction cost is too high, the activity will not take place,” he noted.
Other considerations include enabling ‘netting,’ a process that lets investors combine buy and sell transactions. This could reduce the capital required for trades, benefiting foreign investors significantly.
Postponing Same-Day Settlement
In response to concerns raised by foreign investors, SEBI decided to delay its plans for same-day settlement and retain the current next-day system instead. This decision aims to preserve investor confidence, particularly against the backdrop of:
- India’s economic challenges
- Ongoing trade discussions with Washington