January 27, 2023, was a significant day in the history of India’s capital markets―they fully transitioned to T+1 settlements, which meant if you sold shares you would get the money in your account the next day. They went one better on March 25, 2024, as the stock exchanges debuted T+0 settlement for 25 scrips, which meant sellers would get their money on the same day. The plan is to move to instantaneous settlements next year.
The journey towards shorter settlement had begun when the Securities and Exchange Board of India allowed exchanges to move from T+2 to T+1 settlement cycle in January 2022. It was done in phases and took a year for complete switching. There were hiccups. The custodians of foreign institutional investors resisted it citing some difficulties. But, SEBI chairperson Madhabi Puri Buch ensured that all of them were ironed out.
Quicker settlements offer many benefits, notably the reduction of counterparty risk (the probability that the other party may not fulfil the contractual obligations) and the bolstering of market efficiency, said Rakeshh Mehta, chairman of Mehta Equities. “Furthermore, it is anticipated to substantially lower operational expenses for market participants and reduce the funding costs that brokers face,” he said.
There are, however, many challenges and concerns. A shorter settlement cycle would necessitate an overhaul of the market infrastructure, systems and processes. Also, it may contribute to an increase in market volatility. SEBI says it will continue consultations with stakeholders and the board will review the progress periodically.
Quicker settlement is just one of the many initiatives Buch has been pushing for since she took charge as SEBI chief two years ago. Protecting investors and reducing market risks feature high on her agenda. For instance, SEBI recently raised concerns over the rising froth in the midcap and smallcap segments on the back of significant mutual funds flows into them. The BSE midcap index surged more than 60 per cent over the past year and the smallcap index 56 per cent. Following the regulator’s concerns, the Association of Mutual Funds of India (AMFI) wrote to fund houses urging them to put in place safeguard measures to protect the interests of investors. Though SEBI or AMFI has so far not put any restriction on fund flows to these categories, many fund houses have put certain restrictions on flows into their smallcap funds.
The regulator has also been worried about the rising investor interest in the risky futures and options (F&O) segment. As per its own assessment, nine out of 10 individual traders in equity F&O incurred losses of an average of Rs1.1 lakh during the financial year 2021-22. Now, many brokers flash warning signs on the perils of F&O investing when investors log in to their platforms.
Why not just stop people from doing F&O trading? Buch says, we cannot end up being a “nanny state”. Development of the market, regulation of the market and investor protection, all these things have to be balanced, she said.
Use of tools like artificial intelligence is increasingly playing a big role here. For instance, officers now need not read the entire annual report of a real estate investment trust (REIT) to check for the 14-odd compliances needed. The report can be fed to ChatGPT, a generative AI programme, and an output model has been created listing down all the relevant regulations. SEBI is planning to expand its use. “We just have to tweak this (the AI model) for InvITs (infrastructure investment trusts), and we are looking at deploying this for IPO documents and offer for sale documents also,” said Buch. This means quicker clearing of IPO applications, which in turn will reduce the gap between filing for IPO and going public.
Technology is also being used for picking up front-running (the practice by market-makers of dealing on advance information provided by their brokers and investment analysts, before their clients have been given the information) and insider trading, says Buch. SEBI last month slapped a fine of Rs7.4 crore on several people who were part of the guest panel of a business news channel. They had allegedly made profit on executing trades based on advance information of stock recommendations.
Madhabi Puri Buch | Amey Mansabdar
Buch said there were huge growth opportunities in India’s financial markets and there would be a lot of developmental work to do as well. But, at the same time, it will have to contain fraudulent activities. “Where there is money, there is mischief,” said Buch. “So, there will always be people who will come up with innovative ways to do fraud. We will have to come up with innovative ways to catch them.”
SEBI is preparing guidelines to rein in financial influencers. It took action against two finfluencers―Mohammad Nasiruddin Ansari and P.R. Sundar―for providing investment advisory services without requisite registration. It is also keeping an eye on the small and medium enterprises IPO segment, where Buch has flagged possible signs of manipulation. Some of the IPOs in the SME segment have got subscription 100 times to 900 times higher than the issue size. The BSE SME IPO index has surged 110 per cent over the past year, significantly outperforming the broader markets. “Anybody who approaches a merchant banker gets a royal valuation,” said Avinash Gorakshakar, head of research at Profitmart Securities. “The market is such right now that even garbage is getting value.”
Buch said that since the regulations and risks were different for SME IPOs, it was important for the regulator to underline those through disclosures to investors. SEBI is also working towards identifying evidence related to potential price manipulations in the SME IPO segment.
Buch also wants to deepen financial inclusion. On her agenda is making Rs250 systematic investment plans viable in mutual funds. Over the past few years, retail investments in the equity market via SIPs of mutual funds have picked up in a big way. In February 2024 alone, 49 lakh new SIPs were registered and SIP assets under management have crossed Rs10.52 lakh crore. In most cases, the minimum amount to invest in a fund via an SIP is Rs500 or Rs1,000. “In the next one year, we are hoping to make Rs250 SIPs viable for mutual funds,” said Buch. “Some people do offer Rs100 SIP, but we know it is not viable, so they will not push it. But, if we are able to help the industry make the Rs250 SIP viable, it will really open the door to financial inclusion.”
SEBI is also working on the growth of real estate investment trusts (REITs), infrastructure investment trusts (InvITs) and the municipal bonds market. REITs are publicly traded companies that own and operate income-generating properties. The income earned by the company gets distributed among its unit holders. Though draft guidelines for REITs were first introduced in 2013, the first REIT went public only in 2019 (Embassy Office Parks), and since then only three more REITs have gone public.
SEBI wants to improve the muted demand for REITs, and it has issued guidelines for creation of small and medium REITs (SM REITs). An SM REIT will be allowed to gather funds from Rs50 crore, issuing units to a minimum of 200 investors. This move has the potential to expand the REIT market significantly, as around 328 million square feet of office assets valued at $48 billion come in this category, according to the real state consultancy JLL.
“The REIT market in India grew from Rs30,000 crore to Rs1.3 lakh crore in gross asset value within a span of five years. As the regulatory framework falls into place and fractional ownership platforms overcome initial implementation obstacles, we expect the SM REIT market to experience an even more accelerated pace of growth,” said Samantak Das, chief economist and head of research, India, JLL.
Buch said SEBI was working closely with many stakeholders for the growth of the REIT, InvIT and the municipal bond market. “Hopefully that will be a big one,” she said.