Initial Private Opinion

Towards better governance - The 213th Board meeting reveals an institutional posture of pragmatic calibration

noreply@blogger.com (Sandeep Parekh) — Thu, 26 Mar 2026 01:45:00 +0000

I have a piece with Manas Dhagat in today’s Financial Express on this week’s SEBI board decisions. These are important reforms with respect to both a) ease of doing business as also b) the institutional transparency and governance mechanisms of SEBI itself. The EODB reforms relate to AIFs (post term handling), FPIs (allowing net settlement of funds, not securities), Social Impact Fund (democratisation), Fit and Proper standards (rationalisation - applicable primarily if guilt established), Invits/REITs (flexibilit of investments). The full piece is as below:

SEBI’s 213th Board Meeting: Market Reforms and an Institutional Reckoning

The Securities and Exchange Board of India (SEBI), at its 213th Board meeting on March 23, 2026, approved six sets of reforms that, taken together, reveal the regulatory priorities of the current dispensation under Chairman Tuhin Kanta Pandey. Five are directed at the market, easing compliance for alternative investment funds (AIFs), reducing transaction costs for foreign portfolio investors (FPIs), widening retail access to social finance, providing operational flexibility to infrastructure and real estate trusts, and recalibrating intermediary eligibility criteria. The sixth, and the most consequential, is directed inward: the adoption of a comprehensive conflict-of-interest and disclosure framework for SEBI’s own leadership and employees, in response to the governance questions that marked the final years of the previous chair.

Market-Facing Reforms

On AIFs, the Board has approved a pragmatic exit framework. AIFs may now retain liquidation proceeds beyond the permissible fund life where they face pending litigation or tax demands (supported by documentary evidence), anticipated liabilities (with consent of 75% of investors by value), or residual operational expenses (capped at three years). AIFs seeking to surrender registration while holding such residual amounts will be tagged “inoperative” and exempted from periodic filings, PPM updation, and performance benchmarking. This addresses a genuine regulatory anomaly, funds with no active management being compelled to maintain full compliance infrastructure merely because of residual balances arising from circumstances beyond their control.

The approval of net settlement of funds for FPI outright transactions in the cash market addresses a longstanding inefficiency. Under the gross settlement regime, FPIs were required to fund full purchase obligations independently of offsetting sales, resulting in avoidable capital lock-in and forex conversion costs, particularly acute on index rebalancing days. The reform confines netting to the funds leg; securities delivery remains gross. This calibrated design achieves cost efficiency without increasing risk in the system. Implementation is targeted by December 31, 2026.

The minimum investment in Social Impact Funds has been reduced from ₹2 lakh to ₹1,000, aligning with the minimum application size for Zero Coupon Zero Principal Instruments on the Social Stock Exchange. While the democratisation intent is welcome, whether the investor protection framework designed for an AIF product is adequate at mutual-fund-level ticket sizes will need monitoring.

The “fit and proper person” criteria under Schedule II of the Intermediaries Regulations have been overhauled. The automatic disqualification triggered by pending criminal complaints and FIRs is replaced by a principle-based, case-by-case assessment , a reform consistent with the presumption of innocence and with international practice where conviction, rather than charge, typically triggers rule-based disqualification. Convictions for all economic offences now trigger disqualification (expanding beyond the previous “moral turpitude” standard), the right to be heard before being declared unfit is expressly codified in Schedule II, the category of proceedings triggering non-consideration of registration is confined to Sections 11B(1) and 11(4) of the SEBI Act, and the SCN non-consideration period is halved from one year to six months. The retroactive withdrawal of pending cases initiated under the stricter prior framework is a pragmatic and welcome transitional measure.

On InvITs and REITs, the Board approved four targeted amendments: continued SPV holding post-concession (with a one-year exit window, computed from the later of completion of the concession agreement, conclusion of pending claims, or expiry of the defect liability period); expanded liquid fund deployment to schemes holding AA-rated and above instruments; greenfield investment access for privately listed InvITs (up to 10% of asset value); and broader borrowing permissions for leveraged InvITs covering capital expenditure, major maintenance, and debt refinancing.

The Regulator Regulating Itself

The most consequential resolution, however, concerns SEBI’s own institutional governance. The Board adopted the recommendations of the High-Level Committee on conflict of interest, constituted in March 2025 under former Chief Vigilance Commissioner, one of the first acts of Chairman Pandey upon assuming office, and a direct response to the governance controversy that engulfed his predecessor.

The substantive measures are considerable. The Chairman and Whole-Time Members will now be classified as “insiders” under the Prohibition of Insider Trading Regulations, subjecting SEBI’s leadership to the same trading restrictions the regulator enforces on market participants. Investment restrictions currently applicable to employees now extend uniformly to the Chairman and WTMs, who must liquidate, freeze, or divest equity holdings upon joining. These restrictions apply prospectively to spouses and dependent family members, with existing investments grandfathered. A novel 25% concentration cap limits exposure to any single SEBI-registered intermediary, with breaches triggering mandatory recusal. The institutional architecture includes a new Office of Ethics and Compliance, a digital recusal system, a whistleblower mechanism, and mandatory initial, annual, and event-based disclosures of assets, liabilities, and relationships.

The public disclosure norm for immovable property has been aligned with All India Service and Central Civil Services standards, though full asset and liability details will be disclosed internally to SEBI rather than publicly, reflecting a compromise with employee privacy concerns.

Two significant limitations, however, temper the reform’s force. First, the adopted framework will be incorporated into SEBI’s voluntary 2008 Code on Conflict of Interest for Members of the Board, rather than notified as binding regulations. The HLC had recommended a separate set of enforceable regulations, a recommendation that the Board has referred to the Central Government. The gap between a voluntary code and a binding regulatory framework is not merely procedural; it determines whether non-compliance attracts consequences or merely disapproval. Clearly, that job must be done by the finance ministry.

Second, the proposal for an independent Oversight Committee on Ethics and Compliance which would have provided external supervision of the conflict-of-interest framework, has also been referred to the Central Government. The newly created Office of Ethics and Compliance will, for now, be supervised by the Chief Vigilance Officer, who reports to the Chairman.

The conflict-of-interest controversy of 2024 raised questions not merely about individual conduct but about the adequacy of SEBI’s institutional safeguards. The Central Government’s response to the referred recommendations will be critical in determining whether this episode results in durable institutional reform or a well-documented set of good intentions.

The 213th Board meeting reveals an institutional posture of pragmatic calibration, aligning regulatory requirements with operational reality in the market, while attempting to embed accountability within the regulator itself. The five market-facing reforms are well-designed and responsive to genuine practical difficulties. Whether the accountability reform achieves its purpose will depend on the distance between the voluntary code and enforceable regulation brought by the government. In fact, such a code should be implemented across regulators in the financial markets.

On the same page is FE's own opinion on the subject of governance and accountability norms.

Getting ‘Fit and Proper’ Back in Shape

noreply@blogger.com (Sandeep Parekh) — Fri, 20 Mar 2026 03:49:00 +0000

I have a piece with Manas Dhagat and Pragya Garg in today's Financial Express on the proposed amendment to 'Fit and Proper' norms of SEBI. The proposal is a welcome reform which removes the 'beheading before trial' approach of disqualifying people even though they are not found to have (yet) committed an offence merely because an FIR, Chargesheet or other civil proceedings are initiated:

The securities market operates on public funds and is exposed to systemic risk. Regulators therefore apply a “fit and proper” criterion to assess integrity, competence, reputation, and financial soundness before granting market access. This protects investors and sustains market trust and stability. The Securities and Exchange Board of India (“SEBI”) through a Consultation Paper, proposed amendments to the ‘fit and proper’ framework under the SEBI (Intermediaries) Regulations, 2008 (“Intermediaries Regulations”), reflecting a nuanced attempt to contemporise regulatory standards.

At the heart of SEBI’s proposals is a selective relaxation of certain automatic, rule-based triggers for disqualification in favour of greater reliance on the existing principle-based criteria under the Intermediaries Regulations that aligns more closely with global norms and jurisprudential fairness. This recalibration is not merely semantic. It signals a subtle but important maturing of regulatory philosophy, one that recognises that the presumption of innocence and proportionality are essential to sustaining confidence in India’s capital markets.

Under the existing framework, the mere filing of a criminal complaint or FIR by SEBI, or a charge sheet by any enforcement agency in an economic offence matter, leads to immediate disqualification of intermediaries and their associated individuals, even while the case is still pending. This has often led to reputational and commercial consequences that far outstrip proven misconduct. The proposed amendments remove such automatic rule-based disqualifications and instead anchor the specific rule-based trigger for disqualification at the stage of conviction. However, SEBI retains discretion under the principle-based criteria to consider the pendency of criminal proceedings of a severe nature on a case-to-case basis, and may lay down guidelines regarding cases where such pendency is egregious enough to incur disqualification.

This recalibration produces two salutary effects. First, it reaffirms the fundamental tenet of criminal justice that mere allegations do not amount to guilt. Regulatory intervention at the pre-conviction stage has, at times, risked blurring this essential boundary and undermining the presumption of innocence. Second, it brings greater coherence to the regulatory architecture by harmonising the intermediaries framework with other SEBI regulations, including those applicable to stock exchanges and depositories, which already adopt conviction-based thresholds for specified disqualifications.

While the regulator must remain alive to serious wrongdoing, calibrating thresholds to proven conduct helps avoid premature regulatory penalties that may be disproportionate to the underlying facts.

Another noteworthy proposal in the Consultation Paper is the introduction of express provisions codifying procedural safeguards, specifically the requirement to notify SEBI of events that could affect fitness and to provide the concerned party a reasonable opportunity to be heard before any determination of unfitness is recorded.

Embedding these rights directly into the regulations (rather than relying on administrative practice) brings greater clarity and predictability. While the opportunity of being heard is already afforded in practice, expressly codifying it in the regulations removes procedural ambiguity, a principle that has underpinned fair administrative action in multiple legal contexts.

SEBI’s proposals also target the incidental consequences of unfitness findings. Presently, where a regulatory order declaring a person unfit is silent on the duration of the prohibition on new registration applications, a default five-year bar applies. The amendments seek to remove this automatic consequence, thereby making prohibition periods an outcome of conscious regulatory determination rather than a mechanical consequence of statutory silence.

Further, the ambit of proceedings that trigger registration restrictions, currently including both directions and penalties, is proposed to be confined to actions under Section 11B(1) of the SEBI Act, 1992, which primarily relates to directions. The time period for non-consideration of registration applications upon issuance of a show cause notice is also proposed to be reduced from one year to six months.

Perhaps the most commercially significant proposal is the removal of mandatory divestment for persons in control declared not fit and proper. Instead, the intermediary would be required to ensure that such a person does not exercise voting rights within seven days of such declaration.

This represents a calibrated regulatory response: it neutralises the governance influence of a disqualified person, the core regulatory concern, without mandating the irreversible step of divestment. From a policy perspective, this strikes a better balance between protecting public interest and preserving economic rights given the concerns around irreversible financial loss, particularly in cases where the person may later be acquitted or found not guilty in the proceedings pursuant to which the disqualification was incurred.

The Consultation Paper also proposes a refinement in how insolvency proceedings impact ‘fit and proper’ assessments. Under the existing framework, the initiation of winding-up proceedings could lead to disqualification. Recognising that insolvency processes (especially under the Insolvency and Bankruptcy Code) are inherently resolution-oriented, SEBI proposes that disqualification ought to arise only upon the actual passing of a winding-up order, not at the threshold of initiation.

This is not merely technical tinkering. It acknowledges the commercial reality that many insolvency proceedings result in successful resolution plans and revival, and that penalising entities at the point of process commencement could unjustifiably constrict market participation.

SEBI’s proposal is commendable for seeking to balance regulatory rigour with procedural fairness, ensuring that disqualification mechanisms remain principled and proportionate. If adopted, the changes would help prevent irreversible financial and reputational harm in cases where an individual is later acquitted, while introducing greater procedural clarity and a more calibrated balance between rule-based and principle-based criteria. At the same time, SEBI’s discretion to act on serious concerns on a case-to-case basis would remain intact.

Beyond Consolidation: The Structural Reforms SEBI Needs

noreply@blogger.com (Sandeep Parekh) — Tue, 10 Mar 2026 02:13:00 +0000

I have a piece with Parker Karia and Purva Mandale in today's Financial Express on the Unified Securities Code arguing that the reforms of a new code on securities law is much needed:

About two months ago, the Government introduced the much-awaited Securities Market Code, 2025 (SMC), now being scrutinised by the Parliamentary Standing Committee on Finance. The SMC consolidates scattered laws into one coherent statute, eliminates redundancies, and represents a forward-looking approach to securities regulation. While it incorporates lessons from three decades of market evolution, it falls short on certain structural aspects, which are discussed in this article.

Segregation of Functions

The Supreme Court, and various commissions and committees, have repeatedly noted that SEBI is a unique regulator inasmuch as it performs legislative, executive, and judicial functions. Ordinarily, the arms performing these functions are separate and independent. At SEBI, however, the lines between them are entirely blurred. While a nominal segregation exists, personnel performing these functions are not truly ring-fenced. The SMC's attempt to restrict investigative personnel from enforcement roles provides a more granular internal firewall, but these functions still reside within a single institutional hierarchy where personnel remain fungible. Moreover, such measures already exist and have not proven sufficient.

The segregation required must be deeply structural, not merely procedural. The SMC should restructure the regulator so that the institutional framework itself ensures ring-fencing. The divide between regulator, investigator, and judge should not be mere best-practice guidance. it should be hard law.

This is especially critical for SEBI's quasi-judicial functions. The global standard is for the securities regulator to investigate and file actions before external courts or tribunals, rather than adjudicating in-house. While replicating that model entirely may be impractical given India's judicial delays, the SMC should at least mandate that SEBI's adjudicating officers be external persons, independent of SEBI, particularly in matters involving market abuse, fraud, and insider trading. The US Supreme Court's recent ruling in SEC v. Jarkesy offers a valuable primer on this question. The appointment of external adjudicators with professional qualifications in law and finance, or demonstrable experience in securities adjudication, would likely produce orders that are more robust and less easily overturned on appeal.

SEBI's Investigative Powers

As financial markets grow more sophisticated, so do fraudulent schemes. Those who engage in market abuse do not publicise it. Encrypted and disappearing messages pose significant challenges to effective investigation and successful prosecution. It is difficult to combat white-collar crime with one hand tied behind the back. SEBI itself has acknowledged these difficulties — its proposed SEBI (Prohibition of Unexplained Suspicious Trading Activities) Regulations, 2023 (PUSTA Regulations), sought to shift the burden of proof onto the alleged violator.

While the PUSTA Regulations were not the right approach, SEBI's concerns are legitimate. The solution, however, lies not in reversing the burden of proof, but in broadening the regulator's investigative powers.

With great power comes great responsibility. Any expansion must be accompanied by stringent procedural safeguards ensuring that privacy cannot be invaded without just cause. These safeguards are necessary not only for future powers Parliament may confer, but also for those SEBI already possesses. For instance, SEBI can currently call for the trading or banking details of any person — such powers must be subject to strict due process protections.

Principle-Based Regulation

Laws governing a dynamic sector like securities markets should adopt a principle-based approach rather than a rule-based one. Today, the subordinate legislation governing SEBI intermediaries is highly prescriptive, aimed at ensuring consistency and reducing ambiguity. This departs from common-law principles that allow core law to grow organically through judicial interpretation.

This rule-based approach has led to regulatory overreach and compliance fatigue. It encourages a box-ticking culture, reduces flexibility in adapting to market developments, and increases compliance costs, all of which negatively impact the ease of doing business. Most critically, over-prescription produces both false negatives and false positives: the guilty go free, and the innocent are convicted.

It may be time to shift to a principle-based framework. Regulations would set out broad, high-level guidance that clearly conveys the spirit of the law, allowing flexibility for complex and evolving situations. Regulatory standards would be established through reasoned enforcement orders, allowing principles to be applied contextually. Consider a simple but telling example: the US defines fraud, and implicitly insider trading, in a single sentence. India, by contrast, devotes two entire regulations solely to defining fraudulent activity and insider trading. Where the US has used 150 words, India has used 22,000.

In conclusion, while the SMC is the next logical step for the orderly development of India's securities markets and the fostering of economic growth, this opportunity should be used not merely to consolidate existing laws, but to create a framework that is truly future-proof.

The revival of the Ombudsperson: Towards a comprehensive framework for resolution of disputes in the securities market

noreply@blogger.com (Sandeep Parekh) — Wed, 18 Feb 2026 14:26:00 +0000

I have a piece with Rishabh Jain in today's Financial Express on the promise of SEBI's ombudsman scheme which has never been operationalised till now. The proposed securities code brings it to life with statutory blessing. It would be an important reform which will bring the citizen charter to life. The full piece is as below;

On December 18, 2025, the Finance Minister tabled the Securities Market Code (“SMC”) bill in the Lok Sabha, proposing to consolidate and reform India’s securities legislation, presently contained in three separate statutes. In a step that significantly enhances the jurisdiction and role of the Securities and Exchange Board of India (‘SEBI”), the SMC contains a provision for the Ombudsperson – officers designated by SEBI to resolve investor grievances in relation to deficiency in services rendered by a securities markets service provider (“SMSP”) (viz. an intermediary, a market infrastructure institution (“MII”) or a self-regulatory organisation) or any act or omission of an issuer.

According to the architecture envisioned in the SMC, the investor would first approach an investor grievance redressal mechanism provided or prescribed by SEBI. If the grievance is not redressed within 180 days, the investor may approach the Ombudsperson within 30 days. However, a complaint would not be maintainable before the Ombudsperson if the investor has initiated a proceeding before any court, tribunal, or authority in respect of a matter which is directly or substantially in issue of such complaint.

The “deficiency” in services that may be adjudicated by the Ombudsperson have been defined broadly to mean any fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance which is required to be maintained by or under the SMC, or any rules and regulations made thereunder, or has been undertaken to be performed by an SMSP in pursuance of a contract or otherwise in relation to any service in the securities markets. It includes any act of negligence or omission or commission which causes loss or injury to the investor, as well as deliberate withholding of relevant information to the investor.

If satisfied that the allegations in the complaint are true, the Ombudsperson would redress the complaint and may, by a written order, direct the respondent to comply with its obligations; return the fees, charges or such other amount to the complainant, jointly or severally; or pay such amount as damages to the complainant as may be specified by regulations. The Ombudsperson order would be binding on both the complainant and the respondent.

Further, if the Ombudsperson is of the opinion that the respondent has contravened the securities laws, he may inform SEBI of the same. An Ombudsperson order would not bar SEBI from taking action under the SMC. Ombudsperson orders would be directly appealable to the Securities Appellate Tribunal (“SAT”).

If an SMSP or an issuer/agent fail to comply with an Ombudsperson order, they would be liable to a penalty which would not be less than Rupees ten lakhs but which could extend to three times the unlawful gain made or unlawful loss caused thereby, or to Rupees 100 crores if there is no quantifiable gain/loss or if the gain/loss is less than Rupees 100 crores but the SEBI Adjudicating Officer finds sufficient cause to increase the penalty.

Thus, it is seen that the Ombudsperson, though an officer of SEBI, is envisioned as an independent office exercising judicial powers. The same must be appreciated in light with SEBI’s previous experience with the concept. The SEBI (Ombudsman) Regulations, 2003 (“Ombudsman Regulations”), issued by the SEBI upon the recommendation of the report of the Joint Parliamentary Committee on Stock Market Scam and Matters Relating Thereto.

However, the same could not be operationalized for various reasons. Firstly, SEBI did not have the power to decide a dispute or a lis. Secondly, since SEBI was not clearly empowered under the SEBI Act, 1992 to grant compensation, it could not empower the Ombudsman to do the same. Thirdly, the Ombudsman Regulations did not require the Ombudsman to be a judicial authority, and it was doubtful that a non-judicial authority would be entitled to award compensation. Finally, the Ombudsman Regulations did not provide for an enforcement mechanism to execute the orders of the Ombudsman. Thus, the Ombudsman Regulations were repealed in 2023.

In this backdrop, it is seen that the reintroduction of the Ombudsperson in the SMC is an attempt to operationalize an idea that had been recommended by a Parliamentary Committee over two decades ago but which could not be implemented due to lack of statutory backing. However, certain steps may be taken to further strengthen the mechanism.

Firstly, the SMC does not specify the qualifications of the Ombudsperson. Given that the Ombudsperson is envisioned to act in a judicial capacity, it may be recommended to require in the SMC itself, rather than leaving to regulations, that the Ombudsperson be a person with appropriate legal training and experience.

Secondly, the actions or omissions of the issuer or agent that are subject to the Ombudsperson’s jurisdiction have not been specified. It is recommended that the categories of issuer/agent-investor disputes that are intended to be submitted to the Ombudsperson be clearly defined, so as to avoid conflict of jurisdiction with the company law tribunals.

Thirdly, whereas the body of the SMC contains only three remedies that the Ombudsperson may grant, a Note uses the term “etc.” in relation to such remedies. It is recommended that the Ombudsperson be empowered to grant non-monetary remedies including directions, in order to put the aggrieved in the same place as if the wrong had not happened, or to put in place checks to prevent further wrongs.

Fourthly, it is envisioned that Ombudsperson orders bind only the parties to a dispute. However, in certain cases, third party rights may be affected by the findings in such orders. For instance, if the Ombudsperson finds that a certain pledge on an investor’s shares was created invalidly by a broker, the same would affect the rights of the pawnee. Thus, the Ombudsperson may be permitted to join all necessary and proper parties to the case, and Ombudsperson orders may be made binding on all such parties.

Finally, the procedure applicable to Ombudsperson proceedings has not been specified. The same may lead to ambiguities surrounding the applicability of the Code of Civil Procedure. It would be advisable to explicitly specify that Ombudsperson proceedings would be governed by rules of natural justice, and that Ombudsperson orders would be made public.

The introduction of the Ombudsperson system is a welcome step towards the establishment of a comprehensive system for the resolution of investor grievances in the securities market, an aspiration that SEBI has had for over two decades.

Women Independent Director Leadership Program at Indian Institute of Management, Ahmedabad

noreply@blogger.com (Sandeep Parekh) — Fri, 06 Feb 2026 06:10:00 +0000

Sharing an upcoming IIMA Executive Education program for women leaders preparing for board roles.

Women Independent Director Leadership Program

Dates: March 16 to 19, 2026

Format: case method, simulations, role plays, and peer coaching for board presence

I am co-chairing this short course with Prof. Promila Agarwal at IIM Ahmedabad campus

What you can expect to take away

• Clarity on duties, responsibilities, and liabilities of Independent Directors

• Stronger financial fluency to question statements, value drivers, capital allocation, risk, and controls

• Practical boardroom skills for influence, dissent with respect, and ethical courage

• A working lens on sustainability and stakeholder stewardship

Who it is for

• Senior women leaders, founders, partners, and executives transitioning to oversight roles

• Sitting directors who want a sharp refresher on governance, finance, and ESG

Early bird: 7 percent discount for applications with payment on or before Feb 23, 2026

Application deadline: Mar 2, 2026

If you know someone who could benefit, please forward.

#IIMA #ExecutiveEducation #CorporateGovernance #BoardReadiness #WomenOnBoards #LeadershipDevelopment

IPO listing of PSEs as a sound divestment strategy

noreply@blogger.com (Sandeep Parekh) — Tue, 03 Feb 2026 06:22:00 +0000

I have a piece in the Economic Times on the benefits of divestment, specially in the petrochemicals sector. (28 Jan 2026)

Synopsis

Divestment, when designed as a governance instrument rather than just a sale, transforms state ownership into a continuously scrutinized economic asset. This approach enhances price discovery, capital allocation, and productivity, as demonstrated by the BCCL IPO and the oil and gas sector's market capitalization growth. Effective divestment requires clear objectives, credible disclosures, and sustained governance follow-through.

India’s divestment programme has often been judged too narrowly, as if it is only a fiscal event or a political signal. In reality, the most powerful case for divestment is institutional. When done well, it converts state ownership from an administrative arrangement into a governed, disclosed, and continuously scrutinised economic asset. That shift creates benefits that compound over time for the Government, for investors, and for the companies themselves.

A listed public sector enterprise sits at the intersection of two disciplines that are difficult to replicate inside a purely administrative framework: price discovery and capital allocation. Price discovery matters because it converts broad information, sector expectations, operating efficiency, policy risk, and future cash flows into a daily public signal. Capital allocation matters because it forces management and the shareholder state to justify investment choices, dividend policy, and growth plans in front of a market that can reward or punish the story quickly. This is not just about raising money. It is about lowering the long run cost of capital, reducing informational opacity, and placing national assets into a more efficient feedback loop. It also provides a tool for government to assess the performance and corporate governance by looking simply at the price instead of hundreds of metrics.

Divestment also reshapes fiscal quality, not merely fiscal quantity. Proceeds can support public capex, reduce borrowing needs, and expand room for counter cyclical response when global shocks arrive. But the bigger gain is credibility. When the state shows that it can sell stakes through transparent processes and still preserve strategic direction, it signals a mature state market relationship. That credibility reduces the risk premium that investors attach to state owned firms, which directly affects valuations and future fundraising potential across the PSU universe.

There is a second, often underestimated, economic channel: productivity. Public ownership need not imply low productivity, but weak accountability often does. Listing tightens accountability through a continuous public lens. Targets become measurable. Efficiency initiatives become visible. Working capital discipline becomes a quarterly conversation. Even when the Government remains the controlling shareholder, the presence of minority investors changes incentives in a practical way. Boards must engage. Management must explain. Auditors and analysts ask inconvenient questions. Over time, this shifts the internal culture from merely compliance driven to performance explained.

The regulatory angle is where divestment becomes most compelling. Listing subjects a PSU to SEBI’s disclosure and governance architecture and to the wider framework of market conduct regulation. Continuous disclosure obligations, related party transparency, audit committee effectiveness, and board level accountability do not merely tick boxes. They reduce the space for hidden subsidies, soft contracting, and delayed recognition of costs. Minority shareholder protection strengthens internal discipline because transactions that were once decided in closed rooms now need defensible rationale and reporting. The practical effect is that governance becomes enforceable, not aspirational.

Divestment also complements modern regulatory thinking. India’s market regulator has steadily emphasised disclosure quality, timely information, and stronger governance practices across listed firms. Bringing more state enterprises into the listed ecosystem widens the zone where these norms apply. It improves benchmarking because investors can compare operating metrics across peers. It enhances enforcement leverage because market conduct rules apply with greater consequence. And it deepens the institutional investor base that can engage constructively on governance, risk management, and sustainability.

This is why divestment is not a retreat of the state. It is the state choosing a more sophisticated mode of ownership from tax-payer to tax-payer. The Government can remain strategic, but it becomes more transparent. It can pursue national outcomes, but it must make policy burdens explicit rather than implicit. It can demand service delivery, but it must recognise the cost and compensate it cleanly. The result is a healthier distinction between commercial performance and policy intent, which is exactly what investors need to trust PSU equity. Importantly, the company can raise public money from time to time instead of being solely dependent on the national exchequer.

The recent IPO of Bharat Coking Coal Limited (BCCL) fits into this narrative as a recent proof point of market confidence in a well-executed PSU offering. BCCL, a Coal India subsidiary under the Ministry of Coal, is strategically central to steel and infrastructure, with large reserve visibility and a dominant share of domestic coking coal production. Its public issue, priced at ₹23 per share with an offer size of about ₹1,068.8 crore and post issue valuation of about ₹10,687.8 crore, was positioned on fundamentals and governance credibility and was delivered with intensive institutional outreach. Inspite of the current headwinds in the Indian markets, it drew record scale applications and a headline subscription of 147 times, signalling that execution quality and clarity of narrative can overcome short term risk aversion.

Oil and gas provides a parallel lens, less about an individual issue and more about governance outcomes translating into audited performance and market validation. The combined net profit of ONGC, Indian Oil, BPCL, HPCL, GAIL, Oil India, and Engineers India is stated at over 90 thousand crore in FY 2024 to 25, and market capitalisation expansion is estimated at ₹4.17 lakh crore between FY 2021 to 22 and Q2 FY 2025 to 26. This matters because these enterprises sit at national scale, touching household fuel access, logistics, and inflation sensitivity, so stronger commercial health and clearer governance reduce macro risk.

The central lesson from both sectors is that divestment works best when it is designed as a governance instrument, not only as a sale. That requires three things.

First, clarity on the objective. Is the transaction meant to widen ownership, raise proceeds, improve governance discipline, unlock subsidiary value, or all of these. Markets can handle multiple objectives, but they punish ambiguity. When the Government and the company articulate what changes after listing, how capital allocation will be governed, and how policy obligations will be treated, valuations improve and volatility reduces.

Second, credibility of disclosures. Investors do not expect perfection, but they expect candour. Clear articulation of policy risks, supply realities, capex priorities, and regulatory constraints creates trust. Trust then expands the investor base, which matters because a wider base supports better price discovery and lowers dependency on any one pool of capital.

Third, follow through on governance. Listing is only the start. The dividend and investment balance must be transparent. Related party dealings must be defensible. Boards must function as real oversight bodies. Risk controls must be visible. When these become routine, the market begins to treat a PSU less as a policy proxy and more as an operating enterprise with a distinct strategy.

For the Government, the payoff is a stronger disinvestment franchise, deeper capital markets, and a fiscal pathway that does not rely excessively on distortionary taxation or debt. For investors, the payoff is exposure to national scale businesses under a tightening governance net. For companies, the payoff is discipline, credibility, and a clearer licence to modernise, including technology adoption, efficiency upgrades, and, where relevant, transition readiness.

The next phase of India’s PSU story will be shaped less by debates about ownership and more by the quality of institutional design. Divestment, done with regulatory seriousness and economic clarity, is one of the few tools that improves governance while also improving valuation. That is why it is not merely good policy. It is good economics.

When whispers become truth

noreply@blogger.com (Sandeep Parekh) — Mon, 26 Jan 2026 04:15:00 +0000

I have a piece with Rashmi Birmole and Yash Vardhan in today's (26 Jan 2026) Financial Express analysing the recent order on insider trading exonerating several people in the Adani Green case. The ruling holds that once information enters the public domain, no matter from where, the information ceases to be non-public information. Trades based after the information seeps in would not be prohibited insider trading laws.

When Market Whispers Become Truth

Sebi order sensibly expands the safe harbour protections for trading on public information

India’s insider trading enforcement framework has evolved since the overhaul of the insider trading regulations in 2015. Over the past decade, SEBI has refined definitions and concepts, and prosecuted insider trading charges with increasing sophistication. Yet one question that remained to be clearly answered is when information reported in the media about corporate transactions, that haven’t been formally announced, goes from being a mere ‘market rumour’ to ‘generally available information’? This is crucial because if a piece of information is classified as generally available, then a person cannot be penalised for insider trading for trading using such information, regardless of how it was obtained. The idea is that if the information is already publicly available and priced in, then the advantage an insider has over public investors disappears.

Two recent orders passed by SEBI on December 12, 2025, in the Adani Green Energy–SB Energy matter offer the clearest answer to this question yet.

Both proceedings stemmed from Adani Green Energy Limited’s (AGEL) May 19, 2021 announcement of share purchase agreements executed with SoftBank Group Capital and Bharti Global to acquire their stake in SB Energy Holdings, a transaction that could potentially increase AGEL’s operational capacity by roughly 46%. SEBI investigated trades executed in days preceding the announcement by entities connected to the Adani group. In the first matter, Vinod Bahety, then Head of M&A at the Adani group, was alleged to have communicated inside information about the acquisition to one Tarun Jain, who through proprietary and controlled accounts, consequently purchased 2 lakh AGEL shares on May 14, 2021. In the second, Pranav Adani, a director across multiple Adani entities, was alleged to have tipped his relatives, who purchased AGEL shares on May 17 and 18, 2021. All noticees were exonerated of the insider trading charges without directions, penalties or any directions for disgorgement.

What is particularly curious about this matter is the multiple instances of contradictions between the adjudicating officer’s (AO) conclusions and the findings of the investigating authorities, as captured in the investigation report (IR). The AO’s evaluation of information reported about the acquisition revealed that the very information that SEBI’s own investigating authority had classified as ‘UPSI’ had been in the public eye for most of the UPSI period in question. The AO found that by May 16, 2021, three days before AGEL’s formal announcement, newspapers reported detailed and specific information about the acquisition, including the stage of the transaction, expected valuation of SB Energy and timelines, that the AO noted is the same information which has been alleged as UPSI, that the noticees supposedly possessed and traded on. The AO rejected the investigating authority’s findings about the news reports being speculative merely on the basis that none of the parties to the transactions provided any comments to the media.

Interestingly, the findings indicate that SEBI may have silently accepted that UPSI related to the acquisition was not in existence as on May 18, 2021, which contradicted the IR’s claim that UPSI had existed since April 29, 2021. This was because on May 18, BSE had accepted a disclosure from AGEL to the effect that there was no event that required any disclosure and no definitive agreement was signed at that stage. Ironically, the IR itself recognised this announcement as a major one, leading to an increase in the price of AGEL shares.

The concept of ‘generally available information’ sits at the core of the UPSI definition under Regulation 2(1)(n) of the PIT Regulations. Information qualifies as UPSI only if it is not generally available, where generally available means information accessible to the public on a non-discriminatory basis. This formulation was deliberate, the High-Level Committee that drafted the PIT Regulations recognised that the Indian insider trading framework was founded on the principle of information parity across all market participants, and that information asymmetry, not mere possession of information, is what is prohibited.

Until now, the doctrine has been applied rather conservatively. Curts and tribunals have been careful to distinguish between vague market chatter and what can be considered a concrete and credible disclosure of information about a potential corporate action, in the context of insider trading allegations. The traditional view was that where an issuer denies or declines to confirm media speculation about a transaction, market participants were entitled to treat the matter as unresolved.

The Adani Green orders recalibrate this understanding. The AO reasons that if the information reported in the media is specific and accurate, as evidenced by the eventual exchange announcement made on May 19, 2021, then it can be categorised as generally available, regardless of whether the entities involved confirm/comment on any media reports. If negotiations for a significant acquisition are underway and press reports accurately describe them, that information is considered to be already available in the market as it becomes accessible to public at large.

The orders, treat AGEL’s May 18 clarification as immaterial. Once detailed news reports appeared on May 16, the information had entered the public domain for insider trading purposes, regardless of what the company itself said two days later. Through the Adani Green orders, SEBI has given clearer guidance that detailed, credible financial press coverage of upcoming deals or corporate actions may be treated as ‘general availability’ of inside information about the deal, provided it is accurate, even where the issuer has not confirmed or commented on such coverage. This order sensibly expands the safe harbour protections for trading on public information whether it originated from the company itself or was otherwise available.

A-list lawyer of India by IBLJ, Hong Kong

noreply@blogger.com (Sandeep Parekh) — Wed, 21 Jan 2026 04:21:00 +0000

Delighted to be selected as an A list lawyer of India by IBLJ, Hong Kong. Thanks to my colleagues for delivering excellence and of course our clients for having faith in us.

Enabling acquisition finance

noreply@blogger.com (Sandeep Parekh) — Mon, 29 Dec 2025 07:45:00 +0000

The RBI is cautiously allowing banks to play a more constructive role in India’s M&A landscape. I have a piece with Manas Dhagat and Pranjal Kinjawadekar in today’s Financial Express:

M&A activity in India has entered a period of sustained strength. In 2024 alone, deal-making touched nearly USD 120 billion as Indian companies continued to acquire domestic businesses at a rapid pace. That momentum has carried into 2025, with another USD 50 billion in deals reported in the first half of the year.

The commercial banks in India, despite holding one of the country’s deepest pools of domestic capital, have largely remained spectators. This is largely attributable to the Reserve Bank of India maintaining a conservative approach on permitting bank’s exposure to the capital markets. Under the provisions of the Banking Regulation Act, 1949, and the directives issued under the RBI Master Circular on Loans and Advances, banks are prohibited from granting loans or advances for the purpose of acquiring shares of other companies, including financing corporate takeovers or management buyouts except to the extent of infrastructure sector. The rationale behind this restriction is to ensure that banking funds, which are primarily public deposits, are not exposed to the inherent risks associated with volatile equity investments. But as M&A activity grows in scale and banks push for a larger role, the RBI is rethinking these restrictions.

Historically, banks’ capital market exposures have been subject to tight prudential limits, and bank financing for the acquisition of shares has generally been prohibited. Against the backdrop of a more mature capital market and a stronger banking system, the RBI through its Statement on Developmental and Regulatory Policies has proposed a calibrated easing and rationalisation of these norms, including permitting acquisition finance, widening the scope of lending against securities, and moving towards a more principle-based framework for lending to capital market intermediaries. Pursuant to this announcement, on October 24, 2025, the RBI released the draft RBI (Commercial Banks – Capital Market Exposure) Directions, 2025 (Draft Directions). These directions are proposed to come into force from April 01, 2026. The Draft Directions apply to all commercial banks, except small finance banks, regional rural banks, local area banks and payments banks.

Under the Draft Directions, capital market exposure of banks shall include both their direct exposures and indirect exposures, including investment exposure and credit exposure. Investment exposure refers to bank’s direct or derivative exposure to equity-linked instruments including direct holdings in equity shares, preference shares, convertible securities, units of equity mutual funds and units of AIFs. Credit exposure, however, stretches wider. It captures everything from acquisition finance to promoter funding, loans secured against marketable securities, bridge loans against anticipated equity infusions and financing backed by mutual fund units (other than debt schemes). Over time, these categories developed through a patchwork of standalone circulars and context-specific directions; the Draft Directions now consolidate them into a single, coherent, and principles-based framework.

One of the most significant components of the draft is the framework for acquisition finance, an area India has historically tiptoed around. While Indian companies often relied on overseas bank funding for cross-border acquisitions, domestic financing of acquisitions (apart from infrastructure) remained a grey area. The Draft Directions provide a clear definition of ‘acquisition finance’, as funding extended directly to an acquiring company, or its SPV, for the purchase of all or a controlling stake in a target company’s shares or assets.

However, the RBI has not thrown caution to the wind. The Draft Directions construct a high wall around who can borrow and how much. RBI proposes eligibility filters at both ends of the transaction. The borrower must be a listed Indian body corporate with a satisfactory net worth and at least three years of profitability. The target must have three years of audited financials and must not be a related party. In substance, this ensures that acquisition finance flows to strategic, long-term transactions rather than promoter-level restructurings or intra-group self-deals. The emphasis on long-term value creation is a recurring theme throughout the Draft Directions.

While the Draft Directions permit banks to finance acquisitions involving controlling stakes, often exceeding 51%, such financing remains subject to Section 19(2) of the Banking Regulation Act, which restricts banks from holding, whether as pledgee or absolute owner, more than 30% of a company’s paid-up share capital. Further, the Draft Directions also permit the banks to take additional collateral, subject to their internal policies. Yet where the target is a public company, its ability to offer guarantees or other forms of security may be limited due to the Companies Act, 2013, which restricts financial assistance for the purchase of its own shares.

The prudential framework surrounding acquisition finance is deliberately tight. To contain systemic risk, the RBI has capped a bank’s aggregate exposure to this segment at 10% of its Tier 1 capital (bank’s core equity capital available to absorb losses). In terms of funding limits, a bank may fund only up to 70% of the acquisition value; the remaining 30% must come from the acquirer’s own equity, ensuring meaningful ‘skin in the game’. The Draft Directions require banks to undertake regular monitoring, stress tests, early-warning assessments and valuation checks, creating a tightly controlled environment for acquisition financing.

Against this backdrop, the case for allowing banks to play a more direct role in acquisition financing becomes clearer. Financial sovereignty allows capital flows to be shaped domestically while reducing exposure to external shocks. This objective is advanced when long-term corporate growth is supported by domestic capital rather than offshore funding. Creating regulated pathways for banks to support strategic acquisitions therefore becomes essential, with acquisition finance emerging as the link that enables Indian corporates to execute complex transactions through stable, domestically anchored banking channels.

The Draft Directions represent one possible regulatory response: opening the door to acquisition financing while surrounding it with tight safeguards to preserve systemic stability. While the framework signals a shift, its operational window remains narrow, with stringent eligibility, collateral, and prudential conditions limiting its applicability to a small segment of corporates. Even so, the direction of travel is clear. The RBI is cautiously laying the groundwork for banks to play a more constructive role in India’s expanding M&A landscape, with the final Directions likely to determine how this balance between flexibility and restraint is ultimately struck. Ultimately, this will help with Indian companies achieving scale, without depending solely on foreign loans.

From Retention to Rights: Intermediaries to Recalibrate for DPDP Compliance

noreply@blogger.com (Sandeep Parekh) — Wed, 10 Dec 2025 01:05:00 +0000

I have a piece with Pragya Garg and Yash Vardhan in today's Financial Express on the newly notified data privacy law and its impact on the financial market, and securities market in particular. "What emerges is a regulatory architecture in transition, shifting from a retention-based model to one centred on rights, proportionality and accountability." The full piece is below:

On November 13, 2025, the Ministry of Electronics and Information Technology notified the implementation timelines for the Digital Personal Data Protection Act, 2023 (Act) and published the final version of the Digital Personal Data Protection Rules, 2025 (Rules). Although implementation of both the Rules and the Act follows a staggered model, with core operational obligations applicable from May 2027, data fiduciaries (person(s) determining means and purpose of processing data) now have an 18-month transition window to realign their systems and practices to the new regime. In this backdrop, India’s securities market, though already operating under data governance structures that may appear akin to privacy frameworks, is now at an inflection point that calls for closer regulatory scrutiny.

Take, for instance, data retention obligations. Much like the Digital Personal Data Protection (DPDP) framework, SEBI requires its registered intermediaries to preserve specified data sets. Stockbrokers, for example, must maintain books of account, records and documents for a period of five years. But these requirements were designed with a different purpose in mind: market surveillance, anti-money laundering compliance and investor dispute resolution. The regulatory architecture, therefore, treated data primarily as an asset to be retained, rather than as a right to be managed.

While confidentiality obligations do exist, their force lies largely within operational circulars, and their application can be diluted through broadly worded consents embedded in standard-form client documentation. Data security has been addressed primarily through IT governance norms and cybersecurity standards. Yet one key element remains absent, a systematic obligation to delete or erase personal data once its regulatory or operational purpose has been met. As a result, investors’ personal data within the securities market may continue to accumulate over time in the absence of effective deletion and data minimisation protocols.

Regulators are now poised to review their existing guidelines to ensure that financial regulations and data protection laws align with the Act’s requirements, thereby preventing any conflict between sectoral mandates and core data protection principles. A key area of focus is expected to be the “Know Your Customer” (KYC) regime. The current KYC Master Directions, derived from the Prevention of Money Laundering Act (PMLA), require regulated entities to collect and retain certain customer data for the provision of financial services. While consent is mandatory for obtaining such information, any additional data gathered under a customer acceptance policy will now require a sound legal basis and must conform to the Act’s principle of data minimisation.

In line with this shift, regulators may issue instructions on setting appropriate data retention periods for AML/KYC processes, clarifying that customer data should be retained only as long as necessary to meet statutory AML obligations. They may also reiterate that while sharing customer data with authorities for AML purposes constitutes a legitimate interest under the Act, such sharing must be both necessary and proportionate to the request made.

Further, intermediaries may be required to respect customer rights under the Act including the right to access data and rectify inaccuracies, even within AML/KYC procedures. Regulators may encourage the use of Data Protection Impact Assessments (DPIAs) to evaluate potential privacy risks and update related instructions on customer protection, third-party due diligence, monitoring and data privacy to bring them in line with the new legal framework.

What emerges is a regulatory architecture in transition, shifting from a retention-based model to one centred on rights, proportionality and accountability. The challenge for the securities market will be to pivot without compromising the robustness of market surveillance and financial integrity.

Another interesting aspect to note is that the emerging Consent Manager regime under the DPDP framework may sit alongside, and potentially intersect with the existing Account Aggregator (AA) ecosystem. The AA framework has already created a consent-driven infrastructure for financial data sharing, with standardised consent artefacts, open APIs, and a large set of regulated financial institutions participating across multiple regulators. In contrast, the Consent Managers envisioned under the Act are designed as sector-agnostic intermediaries, enabling data principals to give, manage, review and withdraw consent for various categories of personal data, with registration and oversight placed under the Data Protection Board.

Notably, both frameworks share key conceptual building blocks, including interoperable platforms, consent logging, limits on accessing underlying data and restrictions on outsourcing. This raises an important policy question: can the two systems be read harmoniously? One potential approach could be to treat AAs as specialised consent managers for financial data, or alternatively, to align the technical and legal standards so that intermediaries are not forced to navigate two parallel, and possibly overlapping, consent infrastructures.

Such integration, however, would require careful cross-regulatory coordination and may emerge gradually, shaped by regulatory guidance and industry practice rather than by a single, definitive policy shift.

Further, the issue of outsourcing responsibility reflects a principle already embedded within securities regulation but the DPDP framework may expand its scope in ways that warrant deeper examination. Historically, SEBI regulations have held intermediaries accountable for compliance lapses by third parties to whom functions are outsourced, even when the intermediary has limited operational control. The DPDP regime adopts a similar approach: a data fiduciary remains liable for breaches by data processors, irrespective of contractual arrangements.

However, DPDP may broaden the dimensions of liability by including privacy-related obligations not traditionally captured in securities regulation. An intermediary could now face exposure if an outsourced vendor mishandles consent withdrawal requests, fails to deploy mandated security safeguards, or retains personal data beyond approved timelines. Such developments may compel intermediaries to revisit and re-negotiate existing contracts with processors to explicitly embed DPDP obligations, particularly for entities reliant on cloud providers, payment gateways or external data vendors. Service agreements that historically focused on operational metrics may now need to be recast through the lens of privacy compliance.

As the securities market transitions from retention-centric to deletion-centric protocols, from bundled consent to granular controls, and from operational oversight to privacy-centric governance, early adopters may find a competitive edge. Intermediaries that build transparent, user-friendly consent systems, automate deletion for non-regulatory data, and communicate privacy-first practices to clients could cultivate stronger trust, turning compliance into a market differentiator.

Aligning Profit and Protection - Insights on SEBI’s Mutual Fund Reforms

noreply@blogger.com (Sandeep Parekh) — Thu, 27 Nov 2025 04:29:00 +0000

I have a piece with Aniket Singh Charan and Varun Matlani in yesterday’s Financial Express on SEBI’s proposal to change regulations with respect to mutual funds, in particular it’s attempt to reduce the fees a fund can charge. We argue that a regulator, in the absence of proof that competition is not working, should not be setting rates. While it appears investor friendly, the second order effects of price caps include reversing financial inclusion and dis-advantaging smaller players to name two.

In 1774, a Dutch merchant and broker established what is widely regarded as the first mutual fund by inviting investors to form a trust named Eendragt Maakt Magt meaning “Unity Creates Strength.” Over time, the mutual fund structure has evolved across jurisdictions. Continuing this process, on October 28th, 2025, the Securities and Exchange Board of India (SEBI) released a Consultation Paper on Comprehensive Review of SEBI (Mutual Funds) Regulations, 1996 (MF Regulations)(Consultation Paper), proposing amendments to the existing framework to align the distribution of returns between Asset Management Companies (AMCs) and investors. A few of the major changes, that are the source of heated discussions in the industry are discussed below.

The first such change is the proposal to revise the Total Expense Ratio (TER) limits such that statutory levies (such as STT and GST) are excluded from the computation of the TER. It is proposed that such levies may be passed directly to investors. While this shift enhances transparency and aligns cost pass-through with regulatory intent, it also triggers a consequential downward revision of the existing TER limits. Specifically, the Consultation Paper recommends a reduction of 20 bps for close-ended schemes, and 15 bps and 10 bps for certain categories of open-ended schemes. The magnitude of the proposed downward revision lacks any clear basis and poses concerns for the growth of the mutual fund industry. The downward revision of the TER, exceeds the GST and other statutory components currently a part of the TER and the consequence is an additional, unintended reduction that directly compresses the operating margins of AMCs. In effect, AMCs are compelled to absorb a cost cut that goes beyond the statutory levy adjustment, with no proportionate benefit accruing to investors. Moreover, when AMC revenues are squeezed, the impact is often passed on to MFDs, weakening the distribution network that underpins financial inclusion. A large share of first-time and retail investors especially in smaller towns and underserved regions enter the mutual fund market through these last-mile channels. Any reduction in the economic viability of this network risks undermining the infrastructure that enables widespread investor participation. Mutual funds indeed compete with other assets like insurance and real assets such as property and gold.

In the present day, fees should be determined entirely by market competition, and price controls are increasingly viewed not only as outdated but also as counterproductive. Their second order effects are routinely underestimated in policy debates. Forcing fees artificially downward inevitably erodes service quality, curtails investment in research and investor support, and strips smaller or newer funds of the economic runway needed to grow. The result is predictable, entrenched dominance by a few large players and a shrinking, less diverse industry. Over time, such distortions choke innovation, reduce meaningful choice for investors, and weaken the resilience of the asset management sector that regulation is meant to strengthen. The only reason to impose price controls would be when the normal competitive forces are ineffective as in a monopolistic industry with network effects. Mutual funds are highly competitive an industry.

The Consultation Paper also proposes to permit AMC to charge its schemes investment and advisory fees that are identical, in percentage terms, for both direct and regular plans. While this could be viewed as a welcome and well appreciated move, the unintended impact of the same would be a consequent increase in the overall costs borne by regular plan investors who choose to access mutual funds through MFDs. This too, needs to be carefully studied as investors investing in the market though MFDs are often first time investors who may now be subject to higher overall costs.

Another significant proposal in the Consultation Paper is the steep reduction of the maximum permissible brokerage expense from 12 bps to 2 bps for cash market transactions and 5 bps to 1 bps for derivatives. The stated rationale is that brokerage costs in some instances include not only trade execution but also research services, and since AMCs already possess in-house research capabilities, such additional costs may dilute investor returns. While the objective of enhancing transparency and avoiding duplication of expenses is well-intentioned, the practical realities are more nuanced. In many market segments particularly mid-cap, small-cap, and emerging sectors broker-provided research offers timely, security-specific, and sectoral insights may not be readily available through internal or public sources. Such research plays a complementary role to in-house analysis and supports informed price discovery, ultimately benefiting investors. Brokerage commissions therefore often reflect an integrated service rather than an avoidable add-on cost. A sharp reduction in permissible brokerage limits may constrain AMCs' access to critical external research inputs and could inadvertently impair investment decision-making to the detriment of unitholders.

The Consultation Paper also proposes several amendments to Regulation 24(b) of the MF Regulations, which governs the permissible business activities of AMCs. One such proposal, that an AMC may undertake activities regulated by a domestic or foreign regulator only through a subsidiary and with prior SEBI approval, warrants reconsideration. Where an AMC already maintains adequate structural and operational segregation, and the concerned activities are carried out by a distinct business unit with appropriate oversight, compliance frameworks, and ring-fencing of resources, it may not be necessary to mandate a subsidiary structure. Allowing AMCs to undertake such activities directly, through a distinct business unit, subject to obtaining approvals or no-objection certificates from the regulators with whom they are already registered, would provide greater operational flexibility without compromising regulatory safeguards. This approach would also prevent unnecessary duplication of infrastructure and compliance costs while ensuring that investor interests remain fully protected.

The Consultation Paper walks a careful tightrope between rationalising costs and advancing investor-friendly reforms. However, several aspects warrant deeper examination. The proposed reductions in expense ratios and related regulatory changes compound the pressures already confronting AMCs and risk further eroding margins that are, in many cases of smaller players, already thin. What often remains underappreciated in policy debates is the inherently long gestation period of the AMC business model. Most AMCs operate at a loss for years before achieving the scale necessary to turn profitable. The contemplated amendments risk intensifying this structural challenge and may require deeper analysis of operational feasibility before implementation.

India's highest ranked regulatory firm by Asialaw - Finsec Law Advisors

noreply@blogger.com (Sandeep Parekh) — Tue, 28 Oct 2025 04:18:00 +0000

We’re delighted to share that Finsec Law Advisors has been ranked “Outstanding” in asialaw Rankings 2025 — the highest recognition in India for our Regulatory Practice.

This honour reflects our unwavering commitment to excellence in securities, investment and financial law, and our deep partnerships with clients navigating India’s evolving financial landscape.

Our heartfelt thanks to our clients, colleagues, and peers who continue to trust and inspire us on this journey ~ Sandeep Parekh and Anil Choudhary

Easing investments via IFSC

noreply@blogger.com (Sandeep Parekh) — Wed, 08 Oct 2025 05:12:00 +0000

I have a piece in today's Financial Express with Aniket Singh Charan on easing investments via the GIFT city and how recent regulatory changes will help that.

On August 12, 2025, the International Financial Services Centres Authority (IFSCA) released a circular titled “Regulatory Framework for Global Access Providers”. The circular marks a key step towards clarifying the regulatory framework around Global Access Providers (GAPs) and sets the tone for the next phase of investments through IFSCs.

Historically, Indian investors relied on foreign brokers operating outside the purview of domestic regulators to invest in foreign securities thereby raising concerns over transparency and investor protection. To address this, the IFSCA introduced the concept of GAPs in 2021. GAPs are intermediaries authorised to facilitate access to global financial products and services through regulated international exchanges and foreign brokers. Initially, only IFSCA-registered broker-dealers and recognised stock exchanges could access overseas markets, either via cross-border arrangements with regulated entities or by registering as trading members of foreign exchanges (limited to proprietary trading). For broker dealers, such access required a no-objection certificate from the recognised IFSC exchange.

On April 17, 2025, the IFSCA (Capital Market Intermediaries) Regulations, 2025 were notified thereby revamping the framework for the regulation, registration, and supervision of capital market intermediaries operating in IFSCs. Consequently, the IFSCA chose to further deliberate on how entities in IFSCs provide global access and whether the status quo should be maintained.

Thereafter, on May 08, 2025 the IFSCA released a consultation paper seeking public comments on certain proposals in relation to GAPs (CP 1). The key objective of CP 1 was to introduce clear rules on the registration of GAPs, provide operational modalities, detail permitted products and responsibilities of broker-dealers, define client disclosures, KYC/AML/CFT compliance, code of conduct, periodic reporting, fee structures, and other regulatory requirements.

CP 1 faced criticism for its narrow eligibility criteria for GAP registration. It allowed only subsidiaries of recognised stock exchanges or foreign brokers with IFSC subsidiaries to act as GAPs, effectively excluding IFSCA-registered broker-dealers. This created an uneven playing field. While foreign brokers with group entities holding overseas memberships could offer market access directly, IFSC-based broker-dealers without such memberships would be forced to route access through other GAPs. The framework was thus seen as restrictive and disadvantageous to domestic participants.

To rectify these defects, on May 30, 2025 the IFSCA published a revamped consultation paper (CP 2) that introduced several key changes. The most significant change was that the definition of GAPs was broadened to allow IFSCA-registered broker-dealers to seek registration as GAPs, provided they enter into formal arrangements with foreign brokers that are trading members of a foreign stock exchange to facilitate global market access. This significantly widened participation and would have the effect of creating greater opportunities for investors to diversify globally through regulated channels.

CP 2 was subject to further comments from the public. In this regard, industry participants identified a major issue concerning the selection of foreign brokers with whom GAPs could enter into agreements. As per CP 2, a GAP was permitted to enter into an agreement only with a foreign broker who was registered as a trading member of a stock exchange in the relevant foreign jurisdiction and who complied with the applicable regulatory requirements of that jurisdiction for providing access to stock markets. This regulatory approach created several challenges, particularly when compared with international practices. For instance, in jurisdictions such as the United States of America, the concept of a “broker-dealer” is distinct from that of a “trading member.” A broker-dealer is primarily licensed to engage in securities trading and investment services for clients, whereas a trading member (often referred to as a member of an exchange) is focused on direct participation in the exchange for execution of trades. A broker-dealer is capable of providing multi-dimensional access to the markets in a foreign jurisdictions through tie ups with various trading members. For example, a FINRA-registered broker-dealer could have tie ups with trading members on NYSE, NASDAQ etc. and could act as a single point of contact in the concerned foreign jurisdiction for the GAP, however, it was effectively excluded from entering into agreements with GAPs.

The circular issued on August 12, 2025, identified the issues surrounding this restriction and eased the same considerably. A GAP may now enter into an agreement to provide access with any foreign broker that is duly regulated or registered as a broker (by whatever name called) in its home jurisdiction, provided that such broker offers access to global markets in compliance with applicable laws. Thus, the requirement for the foreign broker to also be a trading member of a stock exchange in the concerned foreign jurisdiction has been done away with. Importantly, foreign brokers are now permitted to further extend access to multiple jurisdictions through their own arrangements, thereby enhancing flexibility and broadening the scope of market access available to investors.

The evolution of the framework around GAPs reflects the progressive approach adopted by the IFSCA. This steady regulatory deepening highlights IFSCA’s dual commitment - to ensure adequate supervision while simultaneously promoting and developing IFSCs as a global investment hub.

The benefits of this revamped approach are significant. First, it is likely to encourage more Indian entities to establish broker-dealer operations within IFSCs, thereby deepening the ecosystem and positioning India as a credible player in cross-border financial services. Second, it provides Indian investors with a transparent, reliable, and regulated alternative for accessing global markets, moving decisively away from earlier unregulated routes. Third, the framework enhances regulatory oversight over the deployment of funds overseas, thereby strengthening investor protection and reducing risks. Finally, by aligning with global best practices, the framework is expected to improve service standards, enhance investor experience, and foster higher quality intermediation in outbound investment channels.

Only time will tell how much capital will be channelled through GAPs, but industry response so far has been largely positive. The hope is that this framework will encourage greater investment through a regulated and supervised route. Its ultimate success, however, will depend on how IFSCA shapes the regulatory framework going forward, striking the right balance between ease of doing business and investor protection.

Reforms in Focus: SEBI’s Push for Market Efficiency and Safeguards

noreply@blogger.com (Sandeep Parekh) — Thu, 25 Sep 2025 22:28:00 +0000

I have a piece with Navneeta Shankar and Yash Vardhan discussing the outcomes of the recent SEBI board meeting on various topics in today's Financial Express.

The Securities and Exchange Board of India (SEBI) has long been tasked with walking a careful line between deepening capital markets and protecting investor confidence. Over the past decade, its approach has gradually shifted from a prescriptive, one-size-fits-all rules toward scale-based, proportional regulation and digital facilitation. The decisions announced by SEBI at its board meeting held on September 12, 2025, reflect this evolution. The measures range from easing IPO norms for large issuers to recalibrating related party transaction (RPT) thresholds, streamlining foreign investor access, and broadening mutual fund participation in alternative asset classes. Taken together, they signal a regulator conscious of market realities and willing to fine-tune compliance without diluting oversight.

One of the most consequential reforms is the proposed amendment to the Securities Contracts (Regulation) Rules, 1957 relating to the minimum public offer and minimum public shareholding requirements for large issuers. Under the revised framework, issuers with a post-issue market cap between Rs. 50,000 crore and Rs. 1,00,000 crore may list with a public float as low as 8% (subject to a floor of Rs. 1,000 crore), while those above Rs. 5,00,000 crore may list with just 1% public offer (subject to a minimum dilution of 2.5% and a floor of Rs. 15,000 crore). Timelines for achieving 25% public shareholding have also been extended, up to 10 years for the largest issuers.

This bifurcation of thresholds represents a more calibrated approach to different issuer sizes. Forcing very large companies to dilute aggressively at listing could result in oversupply, weak valuations, and potential instability. The revised norms ease compliance while still maintaining significant market float over time. A balance must be struck between accommodating market absorption capacity and preserving genuine public participation.

In parallel, SEBI has amended the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, to broaden anchor investor participation in IPOs. Previously divided into two categories based on allocation size, anchor investors will now form a single class with participation rules tied to issue size. The anchor portion has been raised to 40% of the institutional book, with one-third reserved for domestic mutual funds and the remainder for insurers and pension funds. Undersubscription in the insurer and pension fund tranche can be reallocated to mutual funds.

These changes are expected to diversify anchor books and provide structured opportunities for long-term institutional investors. Broader participation by foreign portfolio investors (FPIs) operating multiple funds also becomes easier, aligning India with global practices. While such reservations improve stability and credibility in the anchor book, the regulator must ensure they do not restrict issuer flexibility. Expanding the overall pool of eligible institutions may achieve the same objective without rigid segmentation.

Corporate governance remains another focal point. Amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, introduce scale-based thresholds for determining material RPTs. Instead of a flat numerical test, thresholds are now linked to company turnover, with higher bands for companies with turnover exceeding Rs. 20,000 crore and Rs. 40,000 crore. Subsidiary-level thresholds have also been harmonized with parent-level requirements to avoid arbitrage.

This shift toward proportionality is welcome, as fixed numerical triggers were arbitrary and often disproportionate. By tailoring thresholds to entity size, the framework becomes more rational. At the same time, audit committees must retain discretion to examine transactions beyond mere numbers, as governance risks often lie in qualitative context. Codifying omnibus approval validity periods and clarifying that a “holding company” means only a listed holding company also introduces consistency in industry practices and removes existing ambiguities.

Other decisions taken at the board meeting are reflective of SEBI’s effort to make it easier to do business in the securities markets by simplifying compliance and reducing procedures for participants. For instance, the introduction of the SWAGAT-FI (Single Window Automatic and Generalised Access for Trusted Foreign Investors) framework is designed to unify and streamline access for objectively identified low-risk foreign investors such as sovereign wealth funds, pension funds, and regulated retail funds. By offering benefits such as 10-year registration validity, exemptions from certain ownership restrictions, and simplified demat account structures, the framework reduces regulatory complexity while signalling India’s intent to attract stable, long-horizon capital.

Domestically, SEBI has broadened the scope for accredited investors and large value funds in the alternative investment space. Accredited investor-only schemes will enjoy flexibility on pari-passu treatment and tenure, while the threshold for large value funds has been reduced from Rs. 70 crore to Rs. 25 crore. These reforms recognize the sophistication of accredited investors and expand the potential investor base, though regulators must monitor whether such relaxations are used disproportionately by funds seeking to avoid standard compliance.

Perhaps the most significant reform is the reclassification of Real Estate Investment Trusts (REITs) as equity instruments for mutual fund investment purposes. Until now, both REITs and Infrastructure Investment Funds (InvITs) were treated as hybrid instruments. With the new classification, REITs will fall within equity allocation limits and become eligible for index inclusion, unlocking passive flows and lowering the cost of capital for real estate developers. This is aligned with global practice, where REITs are integrated into equity markets.

Investor protection and financial inclusion were addressed through mutual fund reforms. Exit load caps have been reduced from 5% to 3%, distributor incentives have been revised to encourage inflows from beyond the top 30 cities (B-30 cities), and a new incentive has been introduced for onboarding women investors. These measures, though incremental, reflect a regulatory intent to democratize access to financial products and support underrepresented segments of the investor base.

SEBI has also cleared governance reforms for MIIs, requiring two executive directors in addition to the managing director, with defined roles in operations, compliance, risk, and investor grievances. While aimed at enhancing accountability, rigid role definitions may limit flexibility and a board-approved governance framework could have achieved the objective without such constraints. To SEBI’s credit, it did not bring about the most drastic changes that it had previously proposed by way of consultation paper.

Viewed in totality, SEBI’s decisions at its latest board meeting reflect a regulator that is increasingly pragmatic, adopting differentiated rules for different categories of issuers and investors, promoting digital facilitation, and seeking to harmonize with global standards. The reforms address both ends of the spectrum – mega issuers accessing public markets and small retail investors from B-30 cities.

Yet, execution will determine credibility. As India’s capital markets continue to expand in depth and global relevance, SEBI’s role will be to maintain this delicate balance – between growth and oversight; facilitation and vigilance. The task now is to ensure that facilitation does not outpace vigilance, and that in seeking to open doors, the regulator does not lower guardrails. Over a longer period of time, many of the details should be simplified from today’s positions.

9th Episode of 'Decoding with Finsec’

noreply@blogger.com (Sandeep Parekh) — Wed, 24 Sep 2025 07:21:00 +0000

Delighted to bring to you the 9th Episode of 'Decoding with Finsec’ with Anil Choudhary

where we discuss the recent SEBI Board meetin

A Trillion-Dollar Opportunity: REITs and InvITs as equity instruments

noreply@blogger.com (Sandeep Parekh) — Thu, 11 Sep 2025 01:56:00 +0000

I have a piece with Purva Mandale in today’s Economic Times that re-classifying REIT (Real Estate Investment Trusts) and InvITs instruments as equity would unlock a lot of capital to be directed towards real estate infrastructure.

We highlight how such a reform can:

Remove outdated restrictions on MF investments;
Recognise the economic similarities between REITs/InvITs and equity shares;
Enable global best practices like index inclusion and performance-linked returns;
Broaden investor participation, deepen liquidity, and mobilise capital for growth.

Below is the unedited copy of the piece:

In a pivotal move set to redefine India’s capital markets, the Securities and Exchange Board of India (“SEBI”) has proposed to reclassify units of Real Estate Investment Trusts (“REITs”) and Infrastructure Investment Trusts (“InvITs”) as ‘equity’ instruments. This proposal, detailed in SEBI’s April 2025 consultation paper, holds the potential to unlock significant capital flows into India’s foundational real estate and infrastructure sectors, crucial for driving the nation’s economic growth.

Since their launch in 2014, REITs and InvITs have steadily gained momentum in India. As of March 2024, India has 5 registered REITs and 24 InvITs, out of which a majority are listed, collectively managing substantial net assets, what started as a trickle is now a substantial number. In the financial year 2024, InvITs have raised over ₹33,000 crore – a more than five-fold increase from the previous year – and REITs mobilized close to ₹6,000 crore in investments.

Despite this evident momentum, these instruments remain considerably underutilized. REITs currently constitute only 12% of India’s listed real estate market capitalization and a mere 0.35% of the global REIT index. This stands in stark contrast to mature markets like the U.S., Australia, and the U.K., where REITs account for over 90% of listed real estate market capitalization. With India's real estate sector projected to reach $1 trillion by 2030 and infrastructure requiring a staggering $4.5 trillion in investment over the same period, the question is no longer about the potential of REITs and InvITs, but rather, how best to unleash it further as a means of development and progress.

Under SEBI’s current regulations for Mutual Funds, REITs and InvITs are categorized as ‘hybrid’ instruments. This classification imposes significant limitations on mutual fund investments, capping exposure at 10% of a scheme’s Net Asset Value and 5% per issuer, thus limiting mutual fund inflows. While these restrictions were reasonable when introduced in 2017 to manage a nascent market liquidity and concentration risks, they are arguably outdated given the current maturity and scale of these markets.

Further, the ‘hybrid’ classification limits the inclusion of REITs and InvITs in benchmark indices and discourages passive investment. Thus, these factors collectively limit liquidity and stunt price discovery. Reclassifying these instruments as equity would dismantle these barriers, more accurately reflecting their true financial nature and unlocking their full market potential.

Economically and structurally, the units of REITs and InvITs bear similarities to equity shares. These units represent a proportional beneficial interest in the trust's assets and cash flows, fundamentally differing from fixed debt obligations. Further, the absence of fixed maturity date and requirement of principal repayment supports the cause. The mandatory distribution of at least 90% of net distributable income to unitholders is directly linked to the performance of the underlying assets, mirroring the nature of dividends, which are declared from a company’s profits, rather than contractual payments akin to debt interest.

Furthermore, REIT and InvIT units are publicly listed, traded, and settled on stock exchanges, leveraging the same infrastructure as equity shares, including identical mechanisms for price discovery and trading. Unitholders possess the right to vote on crucial decisions, including asset acquisitions, borrowings, and managerial appointments, directly paralleling the governance rights of equity shareholders. On the taxation front, the Income Tax Act, 1961, already aligns the tax treatment of long-term capital gains on REIT/InvIT units with that of equities. Notably, even SEBI, when establishing the original investment caps in 2017, explicitly acknowledged these inherent equity-like traits.

International experience consistently demonstrates that the equity classification of REITs is rooted in their economic substance, not merely their legal structure. Whether organized as corporations or trusts, listed REITs in major markets like the U.S., UK, Singapore, and Australia share core characteristics with traditional equity securities. These include robust market liquidity, residual risk-bearing by unitholders, and a direct alignment of returns with performance.

These global jurisdictions have seamlessly integrated REITs into mainstream equity indices. This integration has been vital in boosting institutional participation, significantly lowering the cost of capital, and enhancing secondary market liquidity. In the U.S., for instance, REITs are fully integrated into major equity benchmarks such as the S&P 500 and the MSCI US REIT Index, enabling over 150 million Americans to invest in REITs through retirement plans and mutual funds, underscoring their mainstream acceptance. In Singapore, S-REITs constitute 10% of the SGX market capitalization. Australia’s A-REITs, embedded in the S&P/ASX 200, represent a significant portion of the global REIT market. These examples demonstrate how equity classification enhances mainstream integration, fosters greater liquidity, and boosts investor confidence. These international experiences underscore that the equity classification of REITs is driven by economic substance and their functional role within capital markets, not merely by legal form.

To propel REITs and InvITs into India’s investment mainstream, a focused set of regulatory reforms is needed. The first and most foundational step is to formally recognize REITs and InvITs as equity instruments. This reclassification would align regulatory treatment with the true economic nature of these instruments, characterised by residual ownership, market-based valuation, and performance-linked returns, and harmonize India’s approach with international standards adopted in mature REIT markets like the U.S., U.K., Singapore, and Australia.

Secondly, equity recognition would enable the inclusion of REITs and InvITs in major equity benchmarks such as the Nifty and Sensex. This is not merely a technical adjustment but a market catalyst. Index inclusion would unlock automatic inflows from passive investment vehicles, such as Exchange Traded Funds (ETFs) and index-linked mutual funds, thereby deepening liquidity, improving price discovery, and strengthening investor confidence in these instruments. These inflows will automatically incentivise more people to monetise their real assets freeing up capital for further construction of projects.

Rationalising these limits will empower mutual funds to respond to market dynamics more effectively, facilitating broader participation and accelerating capital formation in the real estate and infrastructure sectors. SEBI’s proposed reclassification is a strategic pivot poised to shape the next decade of investment in India. With a compelling economic rationale, strong global precedents, and growing investor interest, the case for formal equity classification is a reform whose time has come.

RBI’s New Co-Lending Directions: Balancing Growth with Guardrails

noreply@blogger.com (Sandeep Parekh) — Wed, 10 Sep 2025 00:04:00 +0000

I have a piece with Aniket Singh Charan and Pragya Garg in today’s Financial Express on the new RBI law on co-lending.

On August 06, 2025, the Reserve Bank of India notified the RBI (Co-Lending Arrangements) Directions, 2025. At first glance, the Directions appear to be incremental changes to an existing framework. But a closer look reveals that they reshape the foundation of how banks, NBFCs, and fintechs will collaborate in extending credit. The new framework widens opportunities, imposes tighter risk-sharing obligations, and sets the tone for the next phase of India’s credit ecosystem.

Co-lending emerged in India as a hybrid model combining the best of both worlds. NBFCs and fintechs, agile in origination and distribution, could reach underserved borrowers in small towns, semi-urban centres, and niche segments. Banks, with their lower cost of funds, provided the balance sheet heft to finance these loans. In theory, both parties gained, NBFCs earned fee income and continued customer engagement, while banks got exposure to segments they struggled to reach.

RBI’s first attempt to formalise this model came in 2020, restricting it largely to priority sector lending or PSL. Soon, concerns were raised with respect to higher effective borrower rates, inadequate disclosures, and NBFCs acting mainly as originators with minimal balance sheet exposure. By 2023–24, the RBI was scrutinising whether such practices were resulting in regulatory arbitrage and systemic risk.

The Directions are the regulator’s response, an attempt to mainstream co-lending arrangements (CLA) while curbing their excesses. .To begin with, co-lending is no longer confined to PSL. Any loan, secured or unsecured, can be originated under a CLA between regulated entities, not just banks and NBFCs. This opens the gates for broader participation, including housing finance companies.

Further, each co-lender must retain at least 10% of the loan exposure on its books. This “skin in the game” requirement ensures that lenders do not offload risks entirely to their partners. Additionally, the use of default loss guarantees or DLGs, where one party promises to absorb losses up to a cap, has been restricted to 5% of loans outstanding in respect of loans under CLA. This prevents an illusion of risk transfer and guards against hidden leverage.

The Directions mandate enhanced disclosures: quarterly and annual publication of co-lending partners, weighted average interest rates, fees charged and paid, and DLG details. Escrow accounts are compulsory for all collections, and tighter Know-Your-Customer rules have been prescribed. Loan transfer timelines are also specified, reducing scope for regulatory arbitrage. The originating regulated entity must ensure that any loan under a CLA is transferred only to the designated partner RE, as per the agreement and the Key Fact Statement at the time of sanction. If such transfer cannot be completed within 15 calendar days, the loan remains on the originating RE’s books and can only be transferred to other eligible lenders as per applicable directions. Moreover, any subsequent transfer of loan exposures originated under CLA, whether to third parties or between REs, must strictly comply with applicable directions and requires mutual consent of both the originating and partner REs. Collectively, these requirements signal that the days of opaque “back-to-back” loan originations are over.

The Directions will reshape the co-lending landscape, bringing both opportunities and challenges. On the positive side, they create a new growth avenue for NBFCs by allowing co-lending across all loan categories, helping them scale beyond the narrow PSL channel. This could unlock long-term growth potential while enhancing their credibility through greater transparency. Banks, in turn, benefit by leveraging the NBFC distribution network without having to build their own last-mile reach, which could expand access to formal credit in historically underserved regions. From a systemic perspective, the RBI’s insistence on risk retention and caps on DLGs ensures that no participant can fully distance itself from loan performance, thereby reducing moral hazard and encouraging a more balanced partnership.

The framework also introduces challenges: compliance with escrow accounts, IT upgrades, and detailed reporting which will raise costs, straining smaller NBFCs and driving industry consolidation. Additional costs may be passed on to borrowers thereby undermining the goal of financial inclusion. Further, operational frictions like system coordination and stricter timelines could erode the model’s fintech-driven efficiency by slowing down disbursements. .

Thus, while the framework strengthens resilience, it risks dampening the agility that gave co-lending its edge.

Globally, co-lending or collaborative lending models have taken diverse forms. In the United States, the Federal Deposit Insurance Corporation has promoted partnerships between large banks and Minority Depository Institutions to channel funds to underserved communities. These arrangements emphasise trust, governance, and community focus, elements RBI is now embedding through mandatory disclosures.

In Europe and East Asia, big techs often collaborate with banks wherein the latter provides low-cost funding while the former contributes towards underwriting models and distribution. The Bank for International Settlements has cautioned that such partnerships disproportionately benefit fintechs unless risk-sharing is properly designed. India’s insistence on a 10% retention echoes this learning, ensuring that originators cannot offload risk entirely.

The Directions are neither overly liberal nor excessively restrictive. They represent a calibrated attempt to harness the promise of co-lending while putting guardrails around its risks. The framework’s success will depend on its execution particularly on whether lenders invest in technology to streamline compliance, whether costs are contained, and whether transparency indeed builds trust with investors and customers.

In the near term, smaller NBFCs may face pain, and credit costs could inch higher. But over the medium term, co-lending could evolve from a niche regulatory experiment into one of India’s primary channels of credit delivery, fuelled by banks’ balance sheets and NBFCs’ last-mile reach. The challenge for all participants will be to avoid viewing the new rules as a compliance burden alone. If treated instead as an opportunity to build transparent, resilient, and scalable lending partnerships, the Directions could mark the beginning of a more balanced, more credible era of joint lending in India.

How do Indian securities regulations and market infrastructure institutions compare to the US?

noreply@blogger.com (Sandeep Parekh) — Mon, 01 Sep 2025 05:33:00 +0000

I have a podcast with Hansi Mehrotra (a Zerodha initiative on investor education), where we discuss the differences in approach of US and India with respect to investor protection and market infrastructure.

How does India’s securities regulatory framework compare with the United States? The answer lies in their differing philosophies: proactive prevention vs. reactive correction. In the U.S., markets have historically been allowed to innovate freely, with regulation catching up only after systemic issues surface—subprime mortgages and crypto are prime examples. India, by contrast, cannot afford such shocks. Its framework is designed for pre-emption, prioritising investor protection and systemic stability from the outset. At the core stands SEBI (est. 1988/1992), empowered by statute to regulate markets, protect investors, and enforce compliance. Importantly, its toolkit includes both administrative penalties and criminal proceedings.

Supporting legislation:

SCRA, 1956 – governs stock exchange integrity.
Depositories Act, 1996 – enabled dematerialisation, ushering in transparency and efficiency.

In the U.S., investor recourse often takes the form of class-action lawsuits. India does not rely on this mechanism. Instead, SEBI directly steps into that role, acting as the primary enforcer of investor rights. Oversight is not unchecked. The Securities Appellate Tribunal provides an independent forum to review SEBI’s orders, ensuring due process and accountability. The result: India’s markets are governed by a preventive, statute-driven framework, while the U.S. leans on market-led innovation with corrective interventions. Each reflects its own economic context.

Access the podcast on:

Spotify Podcast

Apple Podcast

A Second Scheme, or a Second Guess?: Proposals to Broaden the Categorisation of Mutual Fund Schemes

noreply@blogger.com (Sandeep Parekh) — Thu, 14 Aug 2025 01:07:00 +0000

I have a piece with Manas Dhagat and Pranjal Kinjawadekar in today’s Financial Express on SEBI’s proposed changes to the mutual fund regulatory architecture. It is a mixed bag with several positive recommendations. The full piece is as below:

In 2017, the Securities and Exchange Board of India (SEBI) introduced a scheme categorisation framework that transformed the mutual fund landscape. Prior to this, mutual fund houses operated with significant discretion in naming and structuring schemes. It was common to find multiple schemes within the same fund house following near-identical investment strategies but marketed under different names. For instance, titles like “Equity Growth Fund,” “Premier Equity,” or “Opportunity Fund” often masked portfolios heavily tilted toward large-cap stocks.

For retail investors, the result was a heightened sense of confusion. Many found it difficult to differentiate between schemes or evaluate their relative performance. Without clear parameters, comparison across AMCs became a challenge, and investors were often left to navigate a cluttered and inconsistent product universe, which incentivised old wine in new bottle.

SEBI’s 2017 circular sought to address this by introducing 36 distinct scheme categories. These were grouped under five broad heads: equity, debt, hybrid, solution-oriented, and others. Each AMC was permitted to offer only one open-ended scheme per category, with certain exceptions. This measure was aimed at eliminating duplication and improving comparability for investors.

SEBI has taken a step further in its regulatory efforts. On July 18, 2025, it released a Consultation Paper proposing a new round of reforms aimed at revisiting and rationalising mutual fund categorisation, through a Draft Circular. The Draft Circular introduces structural shifts in how AMCs design, govern, and differentiate their offerings.

India’s mutual fund industry today manages over ₹70 lakh crore in assets, underpinned by strong SIP flows and growing retail participation. Over time, this has led to a proliferation of schemes, some meaningfully different, others separated largely by branding. For example, a single AMC may have simultaneously run a “Growth Opportunities Fund” and a “Top 100 Equity Fund,” both tracking similar large-cap benchmarks and holding overlapping stocks.This proliferation has complicated investor choice and clouded comparability. The Draft Circular proposes to introduce clear limits to avoid similar portfolios.

A key proposal is the cap on portfolio overlap between schemes. For certain categories, particularly Value vs Contra funds, and thematic or sectoral equity schemes, the circular proposes a maximum overlap of 50%. The impact is not just procedural. Portfolio decisions can no longer be guided purely by investment logic; they must also pass through regulatory filters. If an AMC operates both a “Value Fund” and a “Contra Fund”, the two must now remain genuinely distinct in holdings. For instance, if both funds hold large stakes in PSU banks or IT companies, that may push overlap beyond permitted levels, requiring rebalancing even when investment rationale remains intact. This may require rebalancing purely for regulatory compliance, challenging traditional portfolio management processes. If these proposals are accepted, AMCs will need systems that detect and respond to such shifts proactively.

In parallel, SEBI is proposing a series of naming conventions to enhance investor understanding. Terms like “Low Duration Fund” would be replaced with clearer alternatives such as “Ultra Short to Short Term Fund.” Duration ranges like “1–3 years” or “4–7 years” would also be reflected directly in the scheme name. Further, SEBI suggests that all references to “Fund” be replaced with “Scheme”.

While this might seem cosmetic, it goes to the heart of investor making sense of complexity.A retail investor may mistakenly believe that an “Income Fund” offers guaranteed returns. Calling it a “Debt Scheme – 3 to 4 Year Term” conveys a more accurate picture of risk and duration. AMCs will be expected to update marketing material, distributor communication, and investor disclosures accordingly.

However, one of the most contentious provisions in the draft circular is SEBI’s proposal to allow an AMC to launch a second scheme in the same category if the existing scheme is over five years old and has an AUM exceeding ₹50,000 crore. This proposal raises certainconcerns as it may dilute the clarity the framework seeks to uphold.

Investment limits for stocks and sectors apply strictly at the scheme level, not the AMC level, to ensure funds remain “true-to-label”. Therefore, a new scheme does not expand an AMC’s investible universe. Instead, the proposal introduces a parallel product that could potentially cannibalize the original scheme, as it requires the existing scheme to be closed to fresh subscriptions upon the launch of the new one.

This raises operational questions. Would SIPs in the existing scheme continue? What happens to systematic transfer plans (STPs)? In practice, the original scheme could be reduced to a redemption-only vehicle, with little incentive for the AMC to maintain active management. The fear is that fund houses may shift focus and resources to the newer scheme, leaving the old scheme orphaned. Such duplication may thus return in a more formalised and sanctioned form under this clause.

On the operations side, AMCs will now need to build systems not just to track performance and compliance, but to assess portfolio similarity across schemes and flag breach risks. Investment ideation and security allocation will need to incorporate overlap considerations. For example, if an AMC’s Value Fund and Contra Fund are running close to the proposed 50% portfolio overlap limit, popular stock ideas like NTPC or telecom majors may need to be allocated preferentially to only one of them. Portfolio construction will increasingly require collaboration between fund managers, compliance teams, and investment committees.

To SEBI’s credit, the draft circular also opens the door to purposeful innovation. Lifecycle Funds with goal-based tenures for retirement, housing, or education are proposed, with glide-path investing models. Sectoral debt funds, REITs, and InvIT-linked exposures are being rationalised within hybrid funds and debt funds, subject to regulatory caps. These are progressive moves that cater to portfolio diversification needs. However, innovation must not come at the cost of governance. Sectoral debt funds must not have more than 60% overlap with other schemes, and sufficient availability of investment-grade securities in the chosen sector before launch. This prevents thematic debt schemes from becoming packaging gimmicks in thin markets.

As the industry reviews the draft and submits feedback, there is hope that the final outcome upholds the spirit of reform without reopening the door to old habits in new packaging.

SEBI’s Push for Governance: Are MIIs Being Over-Engineered?

noreply@blogger.com (Sandeep Parekh) — Thu, 31 Jul 2025 03:12:00 +0000

I have a piece in today's Financial Express on SEBI's proposed amendment to stock exchanges and other MIIs governance with Navneeta Shankar and Purva Mandale. We argue that SEBI's micro-management is not a good idea and creates a moral hazard of 'SEBI certified' combined with a power vacuum at the top as the MD's powers are sought to be curtailed and who reports to whom is also prescribed. The full pieces is as below:

India’s capital markets regulator, SEBI, is once again in the spotlight with its latest consultation paper on the governance of Market Infrastructure Institutions (MIIs), released on June 24, 2025. While the paper aims to reinforce systemic accountability and operational transparency, it has triggered a strong resistance from within the very institutions it seeks to regulate. The proposed framework is a classic instance of regulatory overreach, one that risks undermining the foundational principles of effective governance, blurring the lines of accountability, and constraining the operational flexibility essential for market resilience and innovation. It has shadows of the erstwhile regime where senior SEBI officers sat on the board of MIIs, a practice which cannot adequately be condemned.

SEBI’s efforts to enhance governance within MII are not new. From the Kania Committee in 2002 to the Bimal Jalan and R. Gandhi Committees in 2010 and 2017 respectively, and more recently the Mahalingam Committee in 2022, there has been a steady evolution of oversight frameworks. However, a growing concern is that the regulator’s posture has shifted – from enabling strong, principle-based self-governance to imposing rigid, top-down structural mandates. A similar push last year, in the November 2024 consultation paper, proposed direct SEBI involvement in the appointment and termination of key managerial personnel (KMPs) of MIIs through an external agency-led process. That proposal was met with firm opposition and ultimately not taken up by SEBI in its subsequent board meetings.

One of the most controversial proposals in SEBI’s recent consultation paper is the mandatory appointment of two Executive Directors (EDs) to separately head Vertical 1 (critical operations) and Vertical 2 (regulatory compliance, risk, and investor grievance) of the MIIs, and further, to induct both into the Governing Board, when necessary. For MIIs, this not only blurs the fundamental distinction between management and oversight, but it also risks weakening the effectiveness of Public Interest Directors (PIDs), who are statutorily tasked with protecting market integrity and public interest. More importantly, introducing parallel power centres into an operationally complex environment could lead to confusion, overlapping authority, and weakened coordination. At the heart of this resistance is the belief that a single point of executive authority, i.e., the Managing Director (MD), is essential to ensure clarity, alignment, and accountability across the institution.

Another significant concern is SEBI’s attempt to prescribe in granular detail the roles and responsibilities of the MD, EDs, and specific KMPs like the Compliance Officer, Chief Risk Officer, Chief Technology Officer, and Chief Information Security Officer. SEBI’s proposals fail to consider that these functions are already embedded within the MIIs’ internal policy frameworks, are subject to extensive Board oversight, and regularly reviewed through SEBI’s inspection and audit processes. Codifying them at the regulatory level may inadvertently create rigidity, duplicate existing obligations, and reduce the institution’s ability to adapt. Many within the industry would argue that SEBI should focus on setting broad principles and let MIIs determine how best to implement them, through Board-approved structures suited to their specific scale and operating models. This is also in line with the Mahalingam Committee’s vision, which advocated a balance between rule-based and principle-based regulation.

On the global front, this prescriptive approach appears out of sync with the prevailing international standards. The Principles for Financial Market Infrastructures (PFMI), issued by the Committee on Payment and Market Infrastructures and the Technical Committee of the International Organization of Securities Commissions (IOSCO), stress the importance of clear and transparent governance structures. Importantly, they stop short of prescribing internal hierarchies. The PFMI framework leaves room for jurisdictions to shape governance in ways that reflect local conditions, so long as the end goals of safety, efficiency, and market stability are met. In most mature jurisdictions, MIIs are regulated through outcome-based principles and not organizational templates. By contrast, SEBI’s proposals risk binding all MIIs into a one-size-fits-all framework, regardless of whether the underlying risk justifies such intervention.

Another key proposal in the consultation paper is the treatment of external directorships held by senior MII leadership. In a welcome shift from its earlier restrictive stance, SEBI now proposes to allow MDs to hold directorships in government companies and not-for-profit entities, subject to prior approval and appropriate disclosures. This marks a more balanced and pragmatic approach. While restrictions on commercial board memberships are justified to avoid conflicts of interest, a complete ban would have been unnecessarily limiting. Senior executives often contribute to such bodies in non-remunerative capacities, and their involvement can support sector-wide coordination, knowledge-sharing, and policy alignment. SEBI’s revised position acknowledges the value of such engagements, and ensures that MIIs can continue to benefit from experienced leadership without disconnecting them from the broader market ecosystem.

What is perhaps most concerning to many MIIs is that the proposed reforms could unintentionally erode the authority of the Governing Board itself. By prescribing who must occupy key management positions, who reports to whom, and who must sit on the Board, the proposals effectively constrain the Board’s ability to shape the organization’s executive structure – a power that is fundamental to good corporate governance. There is little evidence to suggest that the absence of designated executive positions has led to any governance failures within MIIs. The objective that SEBI seeks to achieve from the appointment of EDs, particularly ensuring highest priority to public interest, technology and operations, and risk and compliance, over commercial considerations, are already being discharged under the supervision of KMPs, PIDs and the Board of the MIIs. This raises questions about whether the creation of additional executive roles is necessary or justified under the existing, functioning framework.

The issue at hand is not whether MII governance can be improved – it can and should evolve with time. However, governance reform must be based on proportionality, trust, and evidence rather than an assumption that regulatory micro-management is the only way to safeguard the public interest. By preserving the MD’s executive leadership, ensuring robust Board oversight, and allowing MIIs the freedom to design their internal frameworks, SEBI can achieve its goals without sacrificing the flexibility and responsiveness that are essential in a fast-moving market environment.

Ultimately, the regulator’s challenge lies in finding the right balance, i.e., strengthening accountability while letting the MDs run the show, the Boards to effectively govern and the MIIs to breathe without stifling their autonomy. In fact, SEBI needs to travel in the other direction, relaxing the limits to compensation (currently at 0 beyond sitting fees) for independent directors and removal of such nomenclature as ‘public interest’ directors, as if the other directors are compromised acting in self interest.

Regulating AI in the Securities Market

noreply@blogger.com (Sandeep Parekh) — Sat, 19 Jul 2025 15:31:00 +0000

I have a piece with Parker Karia and Varun Matlani on regulation on AI in securities markets in today's Financial Express today:

In one of the first measures undertaken by a regulator in India towards regulating the use of AI, last month, SEBI issued a consultation paper, seeking feedback on its proposals to regulate the use of AI / ML in the securities market.

Broadly speaking, and as defined in the consultation paper, AI refers to technologies that allow machines to “mimic human decisions to solve problems”. ML is a sub-set of AI, and refers to the automatic learning of rules to perform a task by analysing relevant data.

Currently, SEBI requires market infrastructure intermediaries such as stock exchanges, clearing corporations, depositories, etc., and intermediaries such as mutual funds, to report to SEBI on AI / ML systems employed by them, thereby giving SEBI an insight into its use-cases.

Use cases of AI

SEBI has identified that AI / ML is being used for various purposes. For instance, stock exchanges are leveraging AI for sophisticated surveillance and pattern recognition, and brokers are deploying it for product recommendations and algorithmic order execution. Further, AI is also used for customer support.

Based on who is creating an AI / ML system, they can be classified into two categories viz. systems that are built in-house, or sourced from a third party. In this context, it is also important to remember that AI / ML systems can be integrated with each other, as well as with present systems. Further, the capabilities of AIs are expanding rapidly, with AIs making near-accurate predictions in finance and generating model portfolios that could, in not too long from now, give a fund manager a run for his money.

Proposed regulatory framework

In a forward-looking approach, SEBI’s consultation paper proposes guidelines to be framed with five core principles, which are a model governance framework, investor protection, testing mechanisms, fairness and bias, data and cyber security.

Importantly, SEBI has proposed that the services provided by third parties would be deemed to be provided by the concerned intermediary, and thus, be liable for any violation of securities laws. Further, SEBI has extended the applicability of investor grievance mechanism in respect of AI / ML systems as well.

Regulatory Lite Framework

SEBI has proposed a ‘regulatory lite framework’ seeking to segregate between AI / ML systems that have an impact on the clients, and those which are used for internal business operations. Further, even if the AI ML system is outsourced, intermediaries will be liable. The real challenge for intermediaries lies in building the sophisticated internal teams, the robust audit trails, and the technical capacity to manage AI / ML systems. In this context, it is worth considering if SEBI should revisit this approach, and borrow a leaf out of its own playbook.

Earlier this year, in February, SEBI introduced a revised framework for safer participation of retail investors in algo trading. In view of the fact that there were several entities providing various algo strategies to customers, and the consequent risk, SEBI decided to introduce a new class of regulated entities, viz. Algo Providers. While they aren’t directly regulated by SEBI, Algo Providers would have to become agents of stock brokers and be registered and empanelled with the stock exchange(s).

A similar approach can be evaluated in respect of AI / ML systems, and a new class of persons, i.e., ‘AI Providers’ can be introduced. While it is not necessary that SEBI directly regulates such persons, it could result in better oversight and understanding of the evolving nature of the AI industry and its nexus and impact on the securities market. Further, liability can be affixed onto the person or entity actually responsible if a AI / ML system goes wrong, specially if the intermediary had no role in the violation. The alternative, results in a cascading round of litigation, as the investor would sue the intermediary, which in turn would seek to recover losses from the third party vendor (AI Provider). While the investor grievance mechanism is proposed to be extended to AI / ML systems, introducing a new class of semi-regulated players in the securities market could have a better impact on fostering growth in a transparent and accountable manner, with appropriate oversight.

Leveraging the Regulatory Sandbox

SEBI’s proposal includes testing requirements at the time of commencement as well as on an ongoing basis, to ensure that the AI / ML systems are working in the expected manner. In this regard, a key reform which could further propel the growth of AI / ML systems is to allow players to access the regulatory sandbox framework to test their products and systems. This would result in a heightened scrutiny of key AI / ML systems, and allow SEBI to work with emerging players in the AI industry. This would also provide SEBI with key data points, thereby aiding in evolving best practices across the board. This kind of a framework would help SEBI become a proactive regulator as opposed to reacting to technological developments, and would be the first step in transforming SEBI into a regulator whose regulatory frameworks lay down the foundation for further innovation and advancement. This method will allow the regulator to be an enabler rather than impose roadblocks to new technology.

Risks of AI in the Securities Market

The paper highlights potential dangers of AI. The regulator explicitly flags the threat of generative AI being used for market manipulation through deepfakes and misinformation, the systemic concentration risk if the industry leans too heavily on a few dominant AI Providers. The identification of concentration risk is particularly salient, as there exists a danger of unregulated technology providers becoming systemic chokepoints for the industry. Further, since there are only a handful of foundational models, the risk emerges of synthetic data loops, wherein everyone uses the same AI model, trained on the same data, which may cause risk of collusive behaviour and herding.

There is much to applaud SEBI’s proposal of a principle based regulatory-lite framework, that reflects the regulator’s intention to adapt to innovation in technology that would shape the financial markets in the future. At the same time, there are steps it can take to not only regulate, but design a regulatory framework that is ahead of the curve and supports growth and innovation.

Finsec Law Advisors completes 15 years

noreply@blogger.com (Sandeep Parekh) — Thu, 17 Jul 2025 05:37:00 +0000

Thank you everyone for your wishes and goodwill over the past 15 years.

From Boiler Rooms to Broadcasting: SEBI Needs a Stronger Hold on Finfluencers

noreply@blogger.com (Sandeep Parekh) — Thu, 26 Jun 2025 22:10:00 +0000

I have a piece with Aniket Singh Charan and Yash Vardhan in today's Financial Express on SEBI's Hobson's choice on dealing with new age manipulation, the likes of pump and dump schemes. The difference from older similar schemes is the scale -as it is now far easier and cheaper to reach millions of investors, who are often ready to be duped with free money schemes or easy 'tips'. The problem is as much as investors to be aware as is SEBI's to enforce. The full piece is as below:

The weapons of financial deception may have evolved, but the script remains drearily familiar: misinformation, manipulation, and a trail of burned retail investors. The Securities and Exchange Board of India recently passed an order in the pump-and-dump case involving Sadhna Broadcast Limited (SBL), shedding light on how digital platforms are now central to such schemes. Today's con artists have swapped cold calls and call centres for content creators and clickbait thumbnails with the result their reach has grown exponentially.

A pump-and-dump scheme involves artificially inflating the price of a stock using false or misleading information, only for manipulators to sell off their holdings at the peak, leaving retail investors with steep losses. In the SBL affair, SEBI uncovered an orchestrated campaign of circular trading and deceptive YouTube videos, with a scripted price action.

It began with promoters and related entities engaging in circular trading—essentially tossing the stock back and forth among themselves to create the illusion of market activity. With SBL’s shares suffering from low liquidity, even small volumes could cause large price movements. Enter stage left: the “finfluencers.” YouTube videos, peddled by certain notices, promoted SBL as the next multi-bagger, dressed up in the language of financial literacy but dripping with hype and half-truths.

Retail investors, seduced by visions of quick returns and slick presentations, poured in. The exit liquidity provided by their enthusiasm allowed the manipulators to “dump” their shares with perfect timing—a wolf in sheep’s clothing disguised as a financial guru.

SEBI’s order in the SBL case connected the dots between price manipulation, paid digital promotions, and the orchestrated dump of shares. The regulator ordered disgorgement, imposed monetary penalties, and barred several individuals and entities from the market. These measures send a strong message that such conduct will not go unpunished. However, such regulatory actions are remedial and retrospective by their nature.

Not long ago, these schemes lived in the shadows of boiler rooms and SMS spam campaigns. Their reach was limited by manpower and mobile networks. Today’s digital ecosystem, however, lets financial misinformation scale with frightening ease. Finfluencers—part educator, part entertainer, and occasionally part illusionist—now command audiences in the millions, often with little more than a Wi-Fi signal and an alarming degree of confidence.

It is therefore pertinent to note that in an age where pump-and-dump schemes are amplified by finfluencers and social media campaigns, ex-post facto enforcement is necessary but not sufficient. SEBI’s task is undoubtedly difficult. The primary challenge in regulating such platforms and content lies in distinguishing financial literacy content from investment advice. The distinction between the two often collapses when creators promise guaranteed returns or package unverified claims as credible investment ideas. Similarly, it is important to preserve free speech and distinguishing it from investment advice can be hard. Imagine if all stock specific views were considered investment advice, then an Indian Warren Buffet talking about Coke as a great investment with great potential would be considered illegal .

SEBI has attempted to regulate this space by imposing obligations primarily on registered intermediaries and regulated entities to verify their identities with online platforms before publishing investment-related advertisements – where the regulator has in fact gone too far in over-regulating. The intent here is to curb fraudulent promotions and ensure that only verified entities publish financial content. Furthermore, SEBI has issued directives restricting the nature of content that can be disseminated. For instance, a circular prohibits finfluencers from using live stock prices in their educational content, mandating instead the use of price data that is at least three months old. This is intended to prevent "educational" platforms from being subtly used to provide time-sensitive, unregistered investment advice. Regulators globally agree on preventing publication of unregulated financial content online.

We are not unsympathetic to the challenges faced by SEBI in this task, particularly in regulating the distribution of such content through encrypted platforms like WhatsApp and Telegram. However, with respect to other non-encrypted social media platforms such as YouTube, Twitter, etc. there is a growing consensus that such platforms must assume greater responsibility for the financial content they host. This includes implementing robust and proactive mechanisms for identifying, flagging, and removing misleading or fraudulent financial promotions. In India, the Information Technology Act, 2000, provides a "safe harbour" to intermediaries (social media platforms in this case), absolving them from liability for third-party content hosted on their platforms, provided they comply with prescribed due diligence requirements. In this regard, while SEBI has undertaken consultations with such platforms, there is a need to prescribe a formal and public mechanism for faster takedown of content that is violative of extant laws, clearer definitions of harmful financial promotion, stricter verification procedures and due diligence thresholds for paid financial promotions and marketing campaigns, and formal cooperation between platforms and financial regulators.

Ultimately, the strongest line of defence is an informed investor. Regulatory frameworks, platform accountability, and enforcement actions must be complemented by financial literacy efforts that teach skepticism as much as they teach strategy. How often does anyone walk upto you in a market place handing over 500 rupee notes? It is about almost as probable that anyone would give you free advice on the internet or other channels on how to find underpriced assets. We live in a financial ecosystem where every smartphone is a trading terminal, and every influencer a potential advisor.

But the problem is deeper than mere manipulation—it’s one of trust. Retail investors are increasingly relying on internet personalities rather than regulated advisors, not because they are foolish, but because the former speak in plain English, not financial Esperanto. The accessibility and relatability of finfluencers give them credibility, sometimes more than the institutions themselves. This is both a strength and a danger.

Moreover, the monetization model of these platforms is complicit. Algorithms that reward engagement do not pause to verify the truth. A video hyping a penny stock might receive ten times the traction of a cautious explainer on index funds. The system is tilted in favour of the loud, not the learned. In essence, we need a modern-day financial Hippocratic Oath for those dispensing advice—first, do no harm. Until then, perhaps investors would do well to remember: not every ‘expert’ with a ring light and a YouTube channel is looking out for your wealth. Sometimes, they’re just chasing theirs.

Clear Lines of Independence: Rethinking the Ownership of India’s Clearing Corporations

noreply@blogger.com (Sandeep Parekh) — Mon, 16 Jun 2025 05:27:00 +0000

I have a piece in today's Financial Express with Navneeta Shankar and Pranjal Kinjawadekar on the market micro-structure of Clearing Corporations - the heavy lifter, but uncelebrated, in the exchange ecosystem which ensures securities and money move without nearly any risk. The recent proposal of SEBI to push for diversified shareholding may not be a panacea and may in fact cause problems in the future. As Socrates said: a slave with two masters is free. Here is the full piece:

The long-delayed listing of the National Stock Exchange (NSE) has once again taken center stage – not due to valuation hurdles or market sentiment, but because of a deeper, structural concern. This seemingly narrow issue is, in fact, a flashpoint in a larger conversation about how India governs its market infrastructure institutions.

While stock exchanges are always under the market glare, with upticks and downticks discussed breathlessly every micro-second on electronic media, the real grunt work is done by the arcane institution called clearing corporation. These are the entities which transfer funds and securities and manage risk and collateral. They also act as guarantors to every trade, acting as a buyer to every seller and as a seller to every buyer. They work under immense pressure managing both concentrated risk and hard timelines. Though, not celebrated, they are the unseen heroes who ensure the stock markets don’t suffer even if multiple large traders default at the same time. In a way, their lack of limelight is a good sign of health for the markets.

Under the current regulatory framework, clearing corporations must be majority-owned by one or more recognized stock exchanges. This 51% minimum holding was designed to ensure close coordination between trading and post-trade infrastructure. The introduction of interoperability in 2018 between clearing corporations brought in added competition.

In November 2024, SEBI proposed a reimagination of this structure through two alternative models depending on the applicability of the Payment and Settlement Systems (PSS) Act, 2007. The PSS Act brings all payment and settlement service providers under the Reserve Bank of India’s (RBI) regulatory framework. However, clearing corporations are currently excluded from its purview—largely because they remain majority-owned by SEBI-regulated stock exchanges. If this ownership structure is diluted, the rationale for their exclusion becomes less certain, raising the question of whether such clearing corporations should then fall under RBI’s supervision.

But whether diversified ownership automatically translates into institutional independence remains an open question. Replacing a single dominant shareholder with a loose federation of financial entities does not necessarily eliminate conflicts. In fact, large financial institutions and banks owning the clearing corporation introduces new conflicts between ownership and users. Banks or their subsidiaries would have multiple roles in the clearing ecosystem including as bankers, clearing members, custodians to name three. A 100% exchange-owned clearing corporation is at the very least structurally answerable to a single, regulated entity with reputational skin in the game. Not just skin, but virtually every organ. Fragmented ownership, in contrast, may lead to diluted responsibility and strategic drift, especially in times of market stress. Socrates said that a slave with two masters is free. Thus, a clearing corporation with a dozen owners would be free as well, free of accountability and responsibility.

This brings into focus a critical question: Is the goal structural independence or effective accountability? If it is the latter—as it should be—then the solution must go beyond just rebalancing shareholding patterns. It must address the real sources of influence and control.

One such source is the boardroom. SEBI’s proposals remain vague on who would govern these newly independent clearing corporations. What would trigger oversight thresholds for influential shareholders? What safeguards would prevent cross-holdings from intermediaries with commercial interests elsewhere in the market? Without clearly defined caps on board composition, voting rights, and conflict mitigation, diversified ownership could become a shell exercise, less a check on power than a redistribution of it into a vacuum. A range of newly introduced conflict of interest would require hundreds of pages of rules on minimising such conflicts.

There is also the fundamental issue of capitalisation. Clearing corporations are not passive entities; they are capital-intensive institutions, expected to invest heavily in technology, risk management systems, and, most importantly, in their Settlement Guarantee Fund (SGF)—the second-last line of defence in case of a broker default. As of April 2025, NCL’s contribution to the SGF stood at ₹12,083 crore, the bulk of it funded by NSE and NCL from their pockets. If parent exchanges are mandated to exit and these institutions are spun off into independent, diversified entities, it is unclear who will step in to meet future capitalization needs.

SEBI assumes that clearing corporations will remain viable, profit-making entities without needing to raise investor-facing fees. But this assumption may prove overly optimistic.

International examples offer no clear blueprint. While entities like DTCC and Euroclear have diversified ownership, others like LCH and ASX Clear remain exchange-owned. Moreover, many such global clearing corporations benefit from different capital frameworks, public guarantees, or deeper institutional markets. Importing their structures without contextual calibration may do more harm than good. Most of the entities are regular profit driven entities, with several like DTCC being listed.

SEBI’s concurrent proposal to preserve a multi-entity clearing ecosystem is thus a welcome counterbalance. A diverse clearing landscape ensures competitive discipline, offers market participants more choice, and avoids over-reliance on any single institution. It also serves as a buffer during systemic events. But here again, SEBI must resist the temptation to micromanage outcomes. It should not be prescribing how many clearing corporations India needs. Instead, it should set clear rules of the road and let market forces decide how clearing evolves—whether through consolidation, specialisation, or competition.

What SEBI must continue to do, and do well, is enforce governance standards, ensure transparency, and demand robust capitalisation. Every clearing corporation, regardless of size or ownership, should meet high regulatory thresholds for risk management, operational resilience, and investor protection. That is the essence of good regulation: not directing institutional architecture, but supervising it with rigour, something SEBI has done well over the past quarter century.

Clearing corporations perform a quasi-public function and must be structurally insulated from solely commercial pressures. But ownership is not the problem, and changing it is not the cure. Real independence will come from better governance protocols, functional separation, meaningful user representation, and perhaps most importantly, a regulatory framework that evolves with the market.

Mandating that exchanges fully relinquish control may be a problem rather than a solution. A more market-driven approach, informed by commercial viability, systemic risk, and public interest, may offer a better path forward. After all, institutional resilience depends not just on who owns the system, but on who is accountable when it is tested. Ideally, neither a minimum nor a maximum ownership should be prescribed and it should be left to the market to decide which model to adopt. Clearing corporations should of course be very intrusively regulated and supervised and be run more as a utility. Finally, it would be a bit unwieldy for one regulator to supervise the clearing corporation which is otherwise regulated and understood by another. Recall what Socrates said.

Brokers get a side hustle

noreply@blogger.com (Sandeep Parekh) — Sat, 31 May 2025 03:56:00 +0000

I have a piece in yesterday's Financial Express with Navneeta Shankar and Manas Dhagat on the important reform brought by the Finance Ministry - which increases the regulatory perimeter allowed to brokers, who can now do more allied businesses (without jeopardising client interest).

India’s broking industry has long operated under a framework that restricted its ability to diversify or expand, despite evolving client expectations and the changing nature of financial services. New-age investors increasingly prefer platforms that offer a full range of financial services, beyond just stock trading. For decades, Rules 8(1)(f) and 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957 (SCRR), imposed a blanket prohibition on brokers from engaging in any business outside securities or commodity derivatives. This regulatory architecture, rooted in a different era of market activity, came under increasing stress as new-age brokers evolved into multi-service platforms, competing not only with peers but also with fintechs, NBFCs, and wealth managers.

In a significant move poised to recalibrate the regulatory perimeter for brokers, the Department of Economic Affairs (DEA) has now issued a gazetted notification dated 19 May 2025, amending Rules 8(1)(f) and 8(3)(f). The amendment clarifies that investments made by brokers from their own surplus funds will no longer be deemed as engaging in “business” – provided they do not involve client assets or create financial liability for the broker. This change addresses longstanding ambiguity that had clouded investment activity, particularly in group entities and other adjacent sectors.

Rules 8(1)(f) and 8(3)(f) of the SCRR have long stifled brokers, restricting them from engaging, either as principal or employee, in “any business” other than that of securities or commodity derivatives, except as a broker or agent not involving personal financial liability. The intent was to ensure that a broker, whether applying for admission to a stock exchange or already registered, did not expose itself to unrelated business risks that could compromise client interests or undermine market stability. The purpose was straightforward: to ring-fence client assets and ensure that a broker’s other activities do not undermine its core responsibilities in the capital markets.

But over the years, these rules began to suffer from excessive literalism, and the lack of clarity over what would “any business” entail and left the phrase vulnerable to increasingly restrictive interpretations for brokers. A series of circulars issued by the National Stock Exchange, probably with SEBI’s directions, in 2022 — to clarify the scope of permissible activity — went on to prohibit brokers from investing even in group companies engaged in non-securities businesses. These included passive, capital-only investments made from retained earnings, and not involving client funds. The circulars expanded the scope of “any business” so broadly that virtually any strategic capital allocation outside traditional broking could be construed as a violation.

The result was not only interpretive overreach but also regulatory uncertainty. The distinction between business operations and capital deployment began to blur, making it difficult for brokers to determine what was permissible and what was not. This interpretation found its way into enforcement actions and market-wide compliance pressure, pushing brokers into a position where even commercially sound decisions became regulatory risks.

In one such high-profile case, Kotak Securities challenged NSE’s circular before the Bombay High Court, arguing that the stock exchange had no legislative mandate to effectively rewrite the contours of Rule 8 or, consequently, to direct Kotak to submit a restructuring plan over its legacy investments. Interesting, the Ministry of Finance through its department of economic affairs, in its affidavit before the court, endorsed this view, emphasizing that interpretative or substantive changes to the SCRR could only be made by the Central Government itself. Importantly, the DEA in its affidavit drew a critical distinction between doing business and making investments, noting that the former entails recurring engagement and financial liability, whereas the latter, when ring-fenced and responsibly managed, did not pose systemic risks.

Recognising the operational challenges created by the earlier regime, the DEA issued a consultation paper in early 2025 to revisit the rule. It acknowledged that the broking ecosystem had moved beyond traditional models and now demanded flexibility to manage surplus funds, expand services, and grow responsibly. Importantly, the paper argued that blanket prohibitions on investment were excessive, particularly when brokers were already segregating client assets under SEBI’s framework. This ultimately paved the way for public feedback, evaluating whether the long-standing interpretation of Rules 8(1)(f) and 8(3)(f) had outlived their regulatory utility, eventually culminating into the new amendment.

The amendment that follows, strikes a careful balance. It does not dismantle the guardrails around client asset protection, nor does it open the gates to indiscriminate diversification. It simply affirms that investments made by a trading member shall not be construed as engaging in “business,” except where such investments involve client funds, client securities, or arrangements that create financial liability on the broker. This is not a blanket exemption. The carve-out is narrowly tailored, preserving the regulatory objective of protecting client assets and maintaining systemic integrity. What it does change, however, is the treatment of surplus fund deployment. Brokers may now invest in group companies or other businesses, provided such investments are made using proprietary funds, do not lead to contingent liabilities, and are routed through appropriate corporate structures.

For the broking industry, this reform brings both relief and opportunity. Diversification into non-securities businesses can provide brokers with additional sources of revenue, thereby reducing their dependency on market-linked income. Restricting them to narrowly defined securities-related activities not only stifles innovation but also distorts competition, especially against unregulated or differently regulated players such as fintech platforms, NBFCs, or wealth managers. The ability to invest in adjacent verticals offers brokers a path to diversify revenue streams and reduce reliance on transaction-linked income. For instance, a group entity may provide tax planning, estate advisory, or loan distribution services, which complement core broking activities but fall outside the regulatory definition of securities business. This, in turn, enhances financial resilience, particularly in cyclical markets where trading volumes may fluctuate sharply.

For too long, the interpretation of Rule 8 was guided by maximum compliance rather than risk-based assessment. This change marks a shift towards regulatory proportionality – where conduct is assessed based on its effect on market integrity and investor protection. For a sector that plays an increasingly important role in capital intermediation, especially among retail investors, this course correction was overdue. It reinforces the principle that regulation must keep pace with innovation, not to encourage risk, but to avoid rigidity. The government’s move to realign regulatory intent with market realities is an example of responsive governance that listens to market feedback. It not only restores balance but also sets a precedent for financial regulators for evidence-based policymaking, one that preserves the fine balance between prudence and progress.