My Top 5 Takeaways from the SEBI Board Meeting

To investors...

I've been going through the documents from SEBI's board meeting that took place on 30 September 2024.

Capital market observers look forward to this event as this is where the Indian market regulator lays down the rules and informs about the big changes they make.

These changes usually tend to send ripple effects across the market, affecting investors like you and me, dear reader.

While the entire presentation and changes can be viewed on the SEBI's official website, I wanted to share my top 5 takeaways from the meeting.

#1 Digitisation Takes Centerstage

We at Equitymaster have rambled on and on about the Digital India theme and how it's likely to pick up in the coming years and decades.

For instance, we wrote about the stocks of BSE and CDSL being rerated as they're the perfect proxy plays on the capital market growth and digitization.

The SEBI did not hold back this time and announced a big change that puts digitisation at the centerstage.

India's market regulator is bringing trading into the digital age with a major update starting in February 2025.

Currently, traders are required to transfer funds into their trading accounts before placing buy or sell orders. But with SEBI's new reforms, the process is about to become even more seamless and digitally empowered, offering greater convenience and control.

UPI Block Mechanism - Inspired by the ASBA process used in IPOs, this feature ensures your money remains in your bank account, with only the necessary amount being blocked until your trade is executed. If you decide not to trade, your funds remain untouched - no unnecessary transfers.

3-in-1 Trading Account: The future of trading will see your savings, demat, and trading accounts linked, streamlining the entire process. No more moving money between accounts - it's all handled digitally in one unified system.

#2 Bridging the Gap and Bringing a Middle-Ground

There are two sets of investors - the ones who decide to park their money into mutual funds and the high net-worth individuals who give their funds to investment firms for managing.

While mutual funds are considered safer and typically opted by individuals who want to invest a small amount, investment firms or the ones managing your portfolio (portfolio management or PMS) come with a slightly higher risk and are typically reserved for ultra-high-net-worth individuals.

Now, the Indian market regulator is going to introduce a game-changing mutual fund product that bridges this gap, blending the flexibility of PMS with the security of traditional mutual funds, all within a digital-first regulatory framework.

For this, a minimum investment of Rs 10 lakh would be required.

The other change here is this will be a no leverage product - fund managers cannot borrow funds for investments.

This will also have a controlled derivative exposure, limited to 25% of the portfolio, offering a balance between risk and safety.

#3 Same Day Settlement!

Right now, when you buy or sell shares, it takes a full day to settle the transaction which is termed as (T+1), meaning your money or shares arrive in your account the next day.

SEBI recently ran a successful pilot of T+0 settlement on select stocks and received positive feedback.

Now, they're scaling this up to include the top 500 companies.

Currently, only 25 stocks are eligible for T+0 settlement. This will be expanded to include the top 500 stocks in terms of market capitalization in a phased manner.

With this change, what happens now is if you sell shares, your money or shares will be credited to your account by the end of the trading day, giving you faster access to your funds.

For traders who rely on quick liquidity, this is a major shift.

#4 Over 90% F&O Traders Lose Money. It's About to Change with this New Rule...

Two years ago, SEBI's report on trading highlighted that "89 per cent of the individual traders (i.e. 9 out of 10 individual traders) in the equity F&O segment incurred losses, with an average loss of Rs. 1.1 lakh during FY22".

Not surprisingly, in the latest board meeting, the SEBI report showed this number shoot up to 91%. That's right... around 91% of F&O traders lost money in FY24.

Now, in a major push to what's being touted a 6-step framework to get Indians rid of F&O addiction, the market regulator has tightened the derivative norms by rationalising the weekly expiry contracts for the options segment.

Under the new rules, exchanges in India can offer expiry contracts for only one index.

The measures also include increasing the contract size to Rs 15 lakh from Rs 5-10 lakh.

The move is brought in to address excessive trading in index derivatives on expiry day. Currently, be it Monday, Tuesday, Wednesday or Thursday, every day has a set expiry.

For instance, NSE offers weekly options contracts for Nifty Financial index (FinNifty), Nifty index, Nifty Bank index and the Nifty Midcap index.

Now, the exchanges in India, BSE and NSE, have to decide which one index they will keep for the weekly expiry.

Apart from the above two measures, other measures include the increase in tail risk coverage on the day of options expiry, intraday monitoring of position limits, removal of calendar spread treatment on expiry day and upfront collection of option premium from options buyers

Reacting to the news of index limitations, the stock price of BSE has shot up as India's oldest stock exchange is seen as gaining an edge against its rival and IPO-bound National Stock Exchange (NSE).

This move is expected to see a reduction in option sellers, at least the new ones who have joined post the 2020 rally.

It will also result in reduction in trading volumes and increased costs for option buyers.

#5 Why We Could Possibly See More Rights Issues...

Issuing rights shares is another weapon in the company's armoury for fundraising. If you think that initial public offerings (IPOs) are the only way a company can raise funds, you can't be more wrong.

By issuing the rights shares, the company entitles or gives right to its existing shareholders to buy new shares of a company at a discounted price.

Imagine you own 100 shares in a penny stock called ABC Ltd, which is currently trading at Rs 10 per share. The company wants to raise more money to fund its expansion plans, so it decides to do a rights issue. It offers existing shareholders the right to buy one new share for every two shares they already own, at a discounted price of Rs 8 per share.

In your case, as you hold 100 shares, you are entitled to buy 50 new shares at the discounted price of Rs 8 each. To exercise this right, you need to pay Rs 400 (50 shares x Rs 8 per share).

The problem with rights issue till now was the process being very time consuming.

But SEBI has made a big change and under the new norms, the rights issue should be completed in 23 working days from the date of issuer's board meeting approving rights issue. The present average timeline for a rights issue is 317 days. So you could see why this big change can result in companies opting for rights issue...

This new change would be even faster than the preferential allotment route that takes 40 working days.

This basically gives existing investors of a company to participate even more in its growth story.

Some Other Tidbits from the SEBI Board Meeting...

Apart from the above, here are some other interesting takeaways -

– Good News for Investment Advisors and Research Analysts 😊

Now, any graduate in any specific field beyond finance can offer research analyst and investment advisory services, with no prior experience.

– Mutual Fund Lite

The government is expected to introduce the 'MF Lite'. It will have a relaxed regulatory framework for the passively managed mutual fund (MF) schemes in a bid to reduce compliance requirements.

In Conclusion

The impact of the recent changes by SEBI can already be seen in the Indian markets today.

Brokerage firms like IIFL Securities and Geojit Financial Services slipped in early trade following the announcement of the new six-step plan to tighten F&O regulations.

Bombay Stock Exchange (BSE), on the other hand, is seen as a big winner and placed to gain market share.

I have no clue what is going to happen in the coming days with various financial assets. What I do know is that money is flowing into the capital markets.

A user on X pointed out how September 2024 was the biggest month of monetary easing, which ultimately leads to more money printing!

In conclusion, longevity is one of the key factors that people underestimate in investing. Be patient with your investments as the coming few days could be extremely volatile owing to geopolitical tensions in Israel - Iran and Indian traders feeling the heat post SEBI's new rules.

With Equitymaster's powerful tools and stock screener, you have much faster access to information, along with less spin coming from the mainstream media. This access to unfiltered content should allow you to make higher quality decisions as long as you keep your emotions in check.

This is what makes investing so interesting. You must have a curiosity to understand how the investing world works and there is no better example than what has transpired over the last 96 hours or so.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...