Sebi clamps down on derivative markets; algo trading made more accessible

The Securities and Exchange Board of India (Sebi) on Wednesday tightened the derivative markets framework to curb the excessive speculation and prevent small investors from entering the high-risk space. The market regulator, at its board meeting held on Wednesday, also accepted majority of the recommendations made by the Uday Kotak Committee on corporate governance but deferred decision on key proposals such as one on sharing of information with promoters.

Sebi announced steps to make algorithm trading more accessible and reduced the cost of buying equity mutual funds. It also proposed to introduce a new compliance framework for stocks undergoing insolvency proceedings and an “entirely new” set of buy-back regulations.

To ensure derivatives and cash market move in sync, Sebi enhanced the eligibility criteria on stocks allowed to trade in this segment. It further said stocks that don’t meet certain criteria will compulsorily have to be physically-settled. Currently all futures and options (F&O) contracts are cash-settled without any physical delivery. Around 209 stocks are currently traded in the F&O segment, which market players said will reduce following Sebi’s latest measures.

Sebi also introduced the concept of ‘product suitability’ under which investors will have to demonstrate income or knowledge proof to deal in the derivatives segment. According to the new framework, individual investors can take free exposure to markets (both cash and derivative) only up to a certain amount which would be decided based on their total disclosed income as per tax filings. In cases investor chooses to take exposure beyond the specified limit, Sebi has directed brokers to undertake rigorous due diligence and collect appropriate documentation.

“There is over speculation in the (derivatives) market. We are better off without it. We don’t want to spoil our market,” said Ajay Tyagi, chairman, Sebi.

Sebi approved 80 recommendations made by Uday Kotak Committee on corporate governance without any modification. Another 15 other were approved with modifications while eight others were referred to other respective agencies.

Some of the key proposals accepted include limiting maximum number of director positions an individual can hold at listed companies, enhanced disclosure of related party transactions (RPTs) and utilization of funds.

Among the suggestions which have been accepted with modifications include split of roles of managing director (MD) and chief executive officer (CEO), mandatory shareholder approval for royalty payments and one woman director in Top 500 companies. However, one of the important recommendation around sharing of price sensitive information with controlling promoters has be shelved.

Sebi has also proposed to reduce the additional expenses that fund houses are allowed to charge of the daily net asset value of schemes. Currently, rules allow MFs to charge additional expense ratio of up to 20 basis points (bps) which was proposed to be reduced to five bps.

Vidya Bala, head-mutual fund research, FundsIndia said that the impact of a cut by 15 basis points for individual investors is likely to be rather limited because returns are significantly higher, especially in equity schemes. However, the move does contribute towards making mutual funds stand out better.

"Such moves can help make mutual funds more attractive to investors compared with other market linked products,” she said.

Sebi has also put out a discussion paper on special regulations for listed firms undergoing insolvency proceedings under Insolvency and Bankruptcy Code (IBC).

In the paper, the market regulator would propose trading curbs companies under IBC. It would prescribe a framework on sharing of information, reclassification of promoters, compliance with minimum public shareholding norms and delisting pursuant to liquidation. Sebi said it also re-write the rules for share repurchases and ease Takeover Code regulations.

Sebi has also reduced the costs involved in availing colocation (colo) services by allowing the facility to be shared between trading member. This will help even smaller brokers to use the colo facility and bring level-playing field between all the brokers. The market regulator has also asked exchanges to provide tick by tick data free of cost to all members. Further, Sebi has decided to penalise all the algo orders that have been placed beyond 0.75 per cent of the last traded price of the stock. Currently the cap is one per cent of the last traded price. Sebi has also asked exchanges to publish minimum and maximum latencies and provide a simulated market environment for testing of algo software.

To encourage more participation of angel funds, Sebi amended the Alternate Investment Fund (AIF) regulations by increasing maximum investment amount in venture capital undertakings. Regulator has also made the penalties steeper for companies which violate listing regulations.

“The earlier Sebi discussion paper on algo had suggested quite a few regressive measures such as minimum resting time, frequent batch auctions, random speed bumps and randomisation of orders. The measures announced today seem more progressive,” said Harjeet Singh, consultant, department of economic affairs, ministry of finance.