India's financial reforms are attracting investors to its stock market. The country's capital market regulator, the Securities and Exchange Board of India or SEBI, has taken several steps, such as implementing T+1 settlements, stricter IPO rules, and more transparent corporate disclosures bolstering investor confidence. This and stricter trading regulations have improved India's market image. While foreign investment has slowed, domestic investors have absorbed the outflow, demonstrating market resilience. As deeper domestic markets unlock resources, SEBI plans further reforms to solidify India's capital market and empower investors.

A few notable reforms are briefed below. 

T+0 settlement cycle 

SEBI has progressively shortened the settlement cycle. In 2002, they moved from T+5 to T+3, followed by a further reduction to T+2 in 2003. Finally, a phased implementation of T+1 with full adoption by January 2023. This meant sellers received their money the next business day after selling shares. Taking another step towards faster settlements, SEBI launched a pilot program in March 2024 offering T+0 settlement for 25 specific stocks. Under this system, sellers receive their money on the same day they sell. Plans are reportedly underway to move towards instantaneous settlements in the coming year.

While SEBI anticipates this optional T+0 system will offer flexibility for both buyers and sellers with faster access to funds and securities, potential drawbacks exist. However, SEBI's consultation paper (Dec 2023) suggests that participants with access to both markets can bridge any emerging price and liquidity gaps.

Small and Medium REITs

SEBI has introduced Small and Medium Real Estate Investment Trusts (SM REITs) regulations. These regulations aim to bring order to the fractional ownership sector and protect investors, bringing this market under SEBI's ambit. These REITs can raise funds by issuing units, starting at Rs 50 crore (About $6 million), to a minimum of 200 investors. Compared to traditional REITs (with a minimum fund size of Rs 500 crore or about $60 million), SM REITs are like a smaller version.

Traditional REITs typically focus on commercial properties, but SM REITs reportedly have the flexibility to invest in both commercial and residential options. The average annual yield on residential properties in India is currently around 2-3%. It remains to be seen if SM REITs offering such low yields will be successful. Additionally, the impact of SM REIT demand on housing prices will be interesting to observe.

SEBI has set a minimum investment of Rs 10 lakh (About $120,000) in SM REITs, targeting investors with a high-risk tolerance. This is in contrast to existing REITs, where the minimum investment ranges from Rs 10,000 to Rs 15,000 (Between the range of $120-180)

Reforms in the Social Stock Exchange 

In a bid to boost fundraising for social causes, SEBI has introduced reforms to the Social Stock Exchange (SSE). These reforms make it easier for Non-Profit Organizations (NPOs) to participate. The minimum amount an NPO can raise through public issuance of zero-interest bonds (ZCZPs) has been halved from Rs 1 crore to Rs 50 lakh (From about $120,000 to $60,000). Additionally, the minimum investment amount has been reduced tenfold, from Rs 2 lakh to Rs 10,000 (From about $2400 to $120), attracting more retail investors.

The SSE acts as a bridge between NPOs and potential supporters. To list, NPOs must demonstrate their social impact and how they measure their effectiveness. This transparency allows donors to utilize market mechanisms for social good and witness the tangible results of their contributions.  SEBI's reforms enhance the SSE's appeal for both NPOs seeking funding and potential funders. This can be a game-changer for addressing social issues beyond the reach of government initiatives.

ASBA-like facility 

In June 2023, SEBI introduced a new option for investors trading in the secondary market. The UPI block facility leverages the existing UPI mandate system to block funds in an investor's bank account instead of requiring an upfront transfer to the broker. This enhances investor protection by safeguarding their cash collateral. However, it's important to note that this service has yet to be universally available across all brokers, though it was supposed to be operationalized by January this year.

Here's how it works: Investors can choose to block a lump sum amount, which can then be debited multiple times within the available balance to cover settlement obligations over several days. Importantly, using the UPI block is optional. Investors with accounts at multiple brokers can choose to block UPI with some brokers and use traditional non-UPI methods with others. However, if you opt for a UPI block with a particular broker, all your cash collateral for that broker will need to be channelled through the UPI block. The current limit is Rs 5 lakh (About $6000) per block, but investors can have multiple blocks within the overall UPI limit.

Finfluencer regulation

SEBI is cracking down on misleading financial advice by 'finfluencers.' In August 2023, they proposed a regulation restricting registered financial entities, like brokerages and mutual funds, from associating with unregistered finfluencers. This comes after reports revealed that some registered entities paid finfluencers to promote their products, potentially funding unlicensed financial advice. This new rule could significantly impact the broking industry. A draft circular was issued in March 2024 and is expected to be implemented by the end of the year.

AIF amendments

SEBI has introduced amendments to the Alternative Investment Funds (AIF) Regulations to simplify compliance and strengthen investor protection. These changes aim to streamline administrative burdens and enhance safeguards for investors in AIFs, which are investment vehicles pooling capital from wealthy individuals (HNIs and UHNIs) with a minimum investment of Rs 1 crore (About $120,000) each.

A key amendment is the mandatory dematerialization of all new investments made by AIFs after September 2024. Dematerialization refers to converting physical securities into electronic form, which improves security and efficiency. Additionally, SEBI has mandated the appointment of custodians by all AIFs. Custodians are independent entities responsible for safeguarding investor assets. This requirement applies only to specific AIF categories or those with a large corpus, but the new rules will make it universal. Notably, AIFs can choose a custodian who is affiliated with their manager or sponsor.

Thus, fuelled by SEBI's reforms and a surge in domestic participation, the Indian equity market cap has skyrocketed in recent years. SEBI's focus on investor protection, from retail to wealthy participants, coupled with market reforms like T+0 settlement, SM REITs and improving disclosure requirements for corporates, has broadened market participation. Looking ahead, SEBI's planned reforms targeting suspicious trading, information disclosure, and portfolio manager transparency promise a continued focus on market health and many others. With India's digital asset landscape rapidly evolving, both custodians and regulators can expect to stay busy ensuring a robust and attractive market for domestic and foreign investors.

 

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This article has been prepared by Kotak Mahindra Asset Management (Singapore) Pte. Ltd. ("KMAMS").