EXCLUSIVE: SEBI likely to discuss new entry criteria for single stock derivatives in its board meeting

The Securities and Exchange Board of India (SEBI) Board is meeting on June 27. Lots of pending but significant items are likely to be discussed and cleared by the board of the market regulator. As per sources, “The SEBI board is expected to be briefed about the new entry criteria for single stock derivatives, and the board is also expected to relook at the proposed separate regulations for delisting investment and holding companies. The issue was last discussed in the November board meeting, but more data and discussion were sought." 

The much-awaited unregistered fin-fluencer (financial influencer) regulation may also come up for board approval, where SEBI wants to disrupt the revenue model of unregistered fin-fluencers.

To secure investors from falling prey to unregistered research analysts and investment advisors, a mechanism of payment of fees through an exchange platform may also come up for board approval.

People aware of the developments said, “The SEBI board may also be apprised of regulators intent to review the regulations for research analysts and investment  advisors."

Before final regulation, SEBI will come up with a public consultation paper.

There are less than 1,500 investment advisors in the country, and a large number of investment advisors are unregistered, which is insignificant compared to the number of demat accounts in the country, which is more than 15 crore.

The board may also discuss and approve the procedure for charging recovery expenses to asset management companies' books.

As per industry experts, many times, in the case of default, mutual fund houses have to incur significant charges for legal and recovery-related expenses.

Sometimes there is confusion about the manner of charging. So, SEBI wants to bring it under regulation.

Will number of stocks in F&O increase or decrease?

As per people aware of the last discussion with stakeholders, if the board approves the suggested new threshold of Market Wide Position limit, average daily delivery volume, and median quarter order sigma size, then around 45–50 stocks can be added, and also 35–40 stocks may be out of the list, so on a net basis, the list may be close to 190–195 against the existing 182 stocks.

As per a few analyst reports, Zomato, Paytm, DMart, and LIC-like stocks may qualify for F&O.

However, only these criteria may not be sufficient as exchanges will take the final call.

SEBI has proposed a Market Wide Position Limit (MWPL) of Rs 1,250–1,750 crore against the existing criteria of Rs 500 crore, an average daily delivery volume between Rs 30-40 crore against the existing Rs 10 crore, and a similarly median quarter order sigma size between Rs 0.75-1 crore against the existing Rs 25 lakh.

Like the index derivatives for single stock derivatives, a product success framework has also been suggested.

SEBI had last reviewed the entry criteria in 2018, and after seeing a huge jump in turnover of F&O and the listing of new stocks over the years, it was felt by market participants to review it.

Will voluntary delisting regulations pass Board Exam?

The issue was discussed at the November 25 board meeting, but the proposal could not be cleared as more data was sought.

It was felt that in the last few years, the trend of delisting had not been much seen, so more data was required.

Also, there was a discussion about whether the easing of delisting of companies is really required.

Though the intent of the SEBI was to help narrow the discount that investment and holding companies get compared to their intrinsic value.

Meanwhile, SEBI has devised a mechanism for better price discovery of investment and holding companies through a special call auction session, where no price band will be applicable. 

Will SEBI tighten screws on fin-fluencers?

The idea of SEBI is to deal with unregistered financial influencers, as they attract wide public attention because of their reach and mass appeal, and so they can influence investments.

Some may be genuine, but not all may be genuine and may not possess the required knowledge and understanding of the product or services they may be enticing to their followers.

So, SEBI decided to come up with a mechanism to disrupt the revenue model of such fin-fluencers.

SEBI proposed that no SEBI-regulated entity will in any manner deal with such unregistered financial influencers, and those who are registered will have to display their registration details.

Referral fees, commissions, noncash benefits, and profit sharing are the reasons for promoting products by fin-fluencers.

Though with this proposed regulation, SEBI may restrict regulated entities under its domain, the financial world has so many other products and services that fall under different regulators, so a collective and umbrella regulation may be better.

A few more issues may come up before the board for discussion like the evaluation of Market Infrastructure Institutions (MIIs). MIIs include exchanges, clearing corporations, and depositories. 

SEBI wants a third party to evaluate the functioning of these institutions, regulator as proposed in its annual report. 

The annual report of 2022-23, said, “In order to assess and evaluate the performance of an  MII  on various aspects,  it is proposed to develop a framework for evaluating the performance of the  MIIs and its statutory committees across various parameters. This measure is expected to bring in greater accountability in the functioning of MIIs."

The issue of Ease of Doing Business for nonconvertible securities may also come up for board approval. 

The board is also likely to be updated about recent developments like the post-implementation response on T+0. Last time, the board had allowed for a limited 30 stocks only and suggested implementing in a phased manner. 

Issues related to cyber security and glitches in MIIs are also likely to be discussed.

With inputs from Tarun Sharma