Sebi's reforms to aid further retail participation in markets, say experts

Regulatory reforms and innovations have brought investors an annual benefit of ₹900 crore, and the full adoption of certain other initiatives could potentially add ₹3,000 crore more through freed-up capital, according to a 30 July report by NSE Data and Analytics, a unit of National Stock Exchange of India Ltd.

The Indian Capital Markets: Transformative shifts achieved through technology and reforms report highlighted the substantial growth of Indian capital markets, which have outpaced the global average in market capitalization. All thanks to Sebi's regulatory reforms and BSE's innovations.

Investments in mutual funds

The report said Sebi has democratized mutual fund investments through low-ticket SIPs (systematic investment plans) and lumpsum investments. It took note of the regulator’s proposal to introduce a ₹250 SIP to include lower-income segments in the market.

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The report added that reducing the mutual fund redemption timelines to T+2 days could potentially accrue annual benefits worth ₹100 crore.

Radhika Gupta, managing director and chief executive of Edelweiss Mutual Funds, said these moves enhanced mutual funds' transparency and investor-friendliness, which was pivotal in the industry's growth.

Investments in IPOs

Sebi has reduced the IPO listing timeline from T+6 to T+3 days, freeing up liquidity for investors and enabling faster access to capital for issuers.

This could result in a potential annual benefit of approximately ₹130 crore, according to the report.

In 2021, Sebi introduced the Application Supported by Blocked Amount (ASBA) procedure for primary markets, allowing investors to apply for shares in public and rights issues without making any upfront payment.

Experts said that in cases of unsuccessful applications or oversubscriptions, ASBA ensures prompt refunds without any hassles or delays. The NSE report quantified the annual monetary benefit of this measure at approximately ₹320 crore.

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A facility like ASBA was also introduced for secondary markets in January. “This could potentially unlock up to ₹2,800 crore of annual benefits for investors, in the scenario where all investors shift to ASBA-based trading," the report said.

The report also mentioned the T+1 settlement cycle that Sebi introduced in 2021 for all securities in the equity segment. This shift reduced settlement risk and increased liquidity in the market by approximately ₹350 crore in annual benefit to investors, it said.

The regulator also introduced an optional T+0 settlement cycle in March 2024, which could lead to a potential annual benefit of ₹180 crore, the report added.

These forward-looking measures to reinforce investor confidence were required to accommodate the “retail euphoria" that is to follow, said Ravi Prakash, associate partner at Corporate Professionals, a consulting and advisory law firm.

“Out of the total population of about 1.44 billion, approximately 150 million opened demat accounts and even fewer are participating actively in markets. This is just the start of a retail euphoria in the Indian markets," said Prakash, adding that while there has been substantial growth, there is still immense potential for even deeper market participation by retail investors.

He said the market seemed far from saturation and continued to offer significant opportunities for expansion and increased investor engagement.

Experts also believe that a well-regulated market is beneficial as it comforts investors.

A transparent and regulated market is considered a developed market for investors, including foreign investors, to invest into, according to Tanvi Kanchan, head of UAE business and strategy at Anand Rathi Shares and Stock Brokers.

Investor protection

Meanwhile, Sebi amended listing obligations and disclosure requirements, mandating listed companies to disclose material events to stock exchanges. Material events are any significant changes within a company that could affect its financial standing or operations in the market.

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The regulator has also imposed a corporate governance standard, directing the top 350 companies by market capitalization to verify rumours in the market to reduce information asymmetry and promote transparency. While the top 100 companies have been directed to implement rumour verification from June, the remaining 250 companies have time till December.

Ketan Dalal, managing director at Katalyst Advisors, lauded the developments, stating that robust governance norms will increase transparency and enhance confidence. However, he added, it was important to address the overreach in disclosures and initiatives for the ease of doing business, which might help reach the right balance between disclosure and an avalanche of information, which could just confuse investors and add to the compliance burden.

Mismatch in securities demand and supply

While NSE’s report paints a hopeful picture, Sebi whole-time member Ananth Narayan G., has highlighted the mismatch in demand and supply of securities, which market participants, Sebi and policymakers would have to deliberate upon.

“The ₹3.1 trillion of net demand for paper brought in by mutual funds, domestic institutional investors and individuals into the secondary market every year over the past three years far exceeds the roughly ₹2 trillion of annual primary market issuance spanning IPOs, follow-on public offerings, preferential allotments, qualified institutional placements, rights issues and offers for sale," he said during FICCI's 21st Annual Capital Markets Conference on 2 August.

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Narayan warned that this prolonged mismatch could lead to asset price inflation rather than capital formation.