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SEBI Announces New Stock Market Reforms


Posted on 23-Aug-2019 Comments  0

SEBI Board Meet

SEBI announces slew of market friendly reforms at its board meet

In the last couple of years, SEBI board meetings are becoming a key forum for important regulatory decisions. The last SEBI board meeting on 21st August made important shifts in 4 key areas.

Simplifying FPI investments

That was perhaps the theme of the Board meet on August 21st. SEBI has initiated simpler on-boarding process, compliance requirement and documents to be submitted. The number of FPI categories is also being shrunk from 3 to 2 to make it more rational. Now all central banks can register as FIIs even if they are not members of the BIS. In addition the entities that are established and run out of the IFSC, Gujarat will be deemed to have met FPI criteria automatically. In a major shift, the SEBI has allowed FPIs in off-market transfers of shares that are illiquid or unlisted.

Buyback clarification

Firstly, there has been no further clarity on the buyback tax that was introduced in the July budget. But the SEBI has given clarification on the standalone vs consolidated issue where L&T buyback had been stalled. The regulator has retained the maximum debt/equity ratio at 2:1 based on standalone and on a consolidated basis. The only exception will be where the subsidiaries are NBFCs or HFCs and are regulated RBI. Such subsidiaries will have to limit their debt / equity ratio to a maximum of 6:1.

Credit ratings and MFs

These two segments have been in the middle of a major controversy in the last one year since the IL&FS default. Now credit rating agencies will have the explicit authority to call for any data on past or future loans about the rated company either from the company being rated or even from statutory agencies. The idea is to enable the CRAs to have meaningful and timely information to warn on credit downgrades. SEBI also proposed amendments to the Mutual Fund regulations. Now mutual funds will be given flexibility to invest only 10% of their corpus in unlisted NCDs. However, the condition is that these NCDs must have simple structures. Also, such unlisted instruments must be rated and secured with respect to timely coupon payments. The implementation will happen in phased manner by mid-2020.

Insider trading

SEBI has also issued a consultative paper on amendments to the Insider Trading Regulations. Now informants will be given a separate channel to report such insider trades with adequate proof and documentation. A separate division at SEBI will be responsible for protection of informant confidentiality. SEBI has also come out with a reward scheme for such cases where the total disgorgement is more than Rs.1 crore. The payout will be 10% and shall be paid out of the IPEF!

STT on Options

Why the new STT rule for Options could make a big difference

The modified formula for STT on options will kick in from September 01. The STT is normally levied on both sides of a delivery trade in the market and only on the sell-side of intraday and derivatives trades. Let us look at why this was an anomaly in the case of options.

The options STT anomaly

STT on options have been charged at a concessional rate because it is charged on the premium value rather than on the notional value of the contract. This was one of the key factors that had made options very attractive to traders. However, one exception was when you let In-The-Money (ITM) options on F&O expiry day. When you left an ITM option to expire on the F&O expiry day then it would be treated as a delivery trade. That means the delivery STT rate of 0.125% used to be charged on the notional value of the option. For example, if you held an option on an Rs.700 strike price having lot size of 1000 shares, then the contract value would be Rs.7 lakhs. If the stock expired at Rs.705, on F&O expiry, it would be treated as ITM if you left it to expiry. So, you would end up paying STT of Rs.875, which would wipe away nearly 20% of your profits. Under the new STT pricing, you have to pay 0.125% on the moneyness of the option i.e. Rs.6.25. Effective the STT cost of ITM options has fallen by over 90%. But, why is this shift so important and how is it likely to impact option market volumes?

Enables aggressive trading

One of the reasons the ITM options are not traded very aggressively around the expiry is that they tend to become illiquid with sharp spreads. This makes trading in these options risky and hence most options traders tend to keep away from these contracts. ITM options give you the opportunity to trade in lieu of futures with an approximately similar return profile but lower risk. Due to lack of volumes in the last few days prior to expiry, these ITM contracts become very illiquid and hardly attract any buying interest. With the cost of STT coming down so sharply, it is likely to encourage traders to take risk and trade these options close to expiry as the overall cost is quite low and may not really impact your cash flows. 

More structured hedging

Due to the current high STT cost on ITM options, hedgers faced a unique problem in that they had to close hedges rather than leaving them to expiry. Leaving hedged options to expiry is always a better method but with liquidity drying up and options quoting at a discount to intrinsic value, there is normally a rush to cover such options. This creates an unnecessary rush to close hedges and leave positions open. ITM options around expiry were also becoming a buyer’s market and the new STT rates will give a level playing field for traders and hedgers in options!

FM Package

Will the package announced by the FM really give a boost to markets

The long awaited package from the Finance Minister finally happened post trade on Friday. The impact will be known only on Monday but it surely has enough fuel to fire up the markets.

Tax reliefs happen finally

While the super rich tax still stays (with a promise to review in 2022), the FM has scrapped the additional surcharge on all forms of capital gains. This comes as a relief to DFIs and to FPIs that are structured as trusts. That should surely mollify the FPIs and boost the market sentiments. Secondly, the FM has finally done away with the highly controversial Angel Tax under Section 56(2)B, which will be a clear boost for start-ups.

Boost to NBFCs and MSMEs

These two segments were at the centre of the liquidity crunch in India in the last few months. The infusion of Rs.70,000 crore into PSBs will be done on a priority basis. The FM has assured greater MCLR based pricing of loans to ensure quicker transmission of rate cuts. In addition, the NBFCs will also be allowed to use the Aadhar based method of client addition to enable them to expand their client base in a cost effective way. For the MSMEs, the FM has offered a one-time settlement policy without impairing their future borrowing capacity. The FM has also announced additional support of Rs.30,000 crore for the housing finance sector, which is badly hit.

Boost for capital markets

With major infrastructure spending in the offing and with budget constraints, the FM has promised a quick deepening and broadening of the bond markets. Bond markets have been institutional for too long in India and surely needs a change. The FM has also taken steps to provide greater corporate access to global markets with a view to giving them a wider choice of fund raising platforms. However, the government has been largely silent on the sovereign bond raising plans due to the currency risk involved. In a bid to boost the equity side of the capital markets, the FM has simplified the Aadhar based KYC process for demat and MF investing. There will also be a rupee offshore market, which remains to be seen after the experience with Masala Bonds.

Auto sector measures

The one sector that represented the slowdown in consumption was autos. To begin, the FM has deferred the hike in one-time registration to 2020. In a surprising decision, government has given up its no-new-car purchase policy for government departments to boost demand for cars. The FM has also enhanced the depreciation on inventory from 15% to 30% till 2020 to make inventory build-up more viable. Apart from these measures, lower rates should also boost demand. A start has surely been made by the FM!

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