India's market regulator plans major reforms to attract foreign investors

India’s top financial watchdog said Wednesday it wants to make several big changes to bring overseas investors back to the stock market. Cut red tape. Lower trading fees. Make it simpler to borrow shares.

Tuhin Kanta Pandey took over as chairman of the Securities and Exchange Board of India in March. Since then, he’s been moving to make rules friendlier for international fund managers, local investment firms, and businesses. A big shift from the stricter approach under his predecessors.

This push comes as foreign money managers have pulled nearly $17 billion from Indian stocks this year. The economy is also taking a hit from steep US tariffs on Indian exports.

Pandey said talks with overseas players showed one thing kept coming up: registration takes way too long.

“In my interactions with foreign participants, both in India and abroad, I got the feeling that the number one (issue) is that our registration process still takes too long. It is unacceptable,” Pandey said as reported by Reuters.

“Our objective is to make it into a few days, not even a month.”

Boosting stock market activity

The regulator is reviewing a bunch of rules, including ways to get more action in India’s regular stock market. Officials want to look at deposit requirements for buying and selling shares.

“While the liquidity in cash markets has improved in the last few years we want it to improve further,” Pandey said. “Some decisions may have to be taken in terms of margins.” He didn’t spell out the details.

Here’s something interesting about India’s markets. The derivatives market, where people bet on future price movements, has gotten massive. More than 300 times bigger than the regular stock market.

Cooling down wild derivatives bets

Futures and options trading have blown up among regular investors. SEBI’s been trying to pump the brakes. The agency is looking at “product suitability” rules, Pandey said. Make it harder for small investors to dive into risky derivatives trades.

But first, the regulator wants to see how its recent changes play out.

“We have highlighted the problem that there is irrational exuberance of some of the players, whom we consider not really adequately informed about the risks in the market,” Pandey said.

“We will first have to look at the measures already in place … We need a certain stability of approach in the way we assess this problem.”

These proposal details haven’t been reported before.

SEBI’s reviewing short-selling rules and the system for borrowing and lending shares. Pandey said these markets are pretty shallow right now.

“We have to look at costs. If the transaction cost is too high the activity will not take place,” he said.

There’s talk about allowing “netting” too. It lets investors combine buy and sell transactions, which means less money sitting around to fund trades. Big deal for foreign investors, especially.

India’s central bank doesn’t allow it yet.

“Perhaps netting in the same scrip may not be possible but in different scrips is possible. If we do that, that will be a big facilitative step,” Pandey said.

After foreign investors complained, the regulator backed off plans to move to same-day settlement. It will stay with the current next-day system for now. As Cryptopolitan noted, India’s economic troubles and trade talks with Washington have made these changes more pressing. Policymakers don’t want to lose investor confidence.

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