Key takeaways from the SEBI Board Meeting, November 2023

29 Nov 2023 , 09:19 AM

A significant Board meeting outcome

When the meeting of the SEBI Board concluded on November 25, 2023, it had made some very significant announcements for the capital markets. Not all announcements were made in the press release, as some were also made when the SEBI Chair, Madhabi Puri Buch interacted with the media in the aftermath of the board meeting. Broadly, some of the areas that the Board meeting and the post meet conference covered were fractional ownership of realty, tweaking regulation of AIFs, regulatory framework for index providers, clarity on the journey towards T+0 settlement system etc. Here is a gist of some of the key announcements made by SEBI in the Board meeting as well as in the interaction that the SEBI chair had with the media post the meeting.

Clarity on journey to T+0 and instant settlement

Investors need to bear in mind that currently India operates markets on a T+1 rolling system. That means, shares bought today are credited to the demat account by end of next day and if shares are sold then the funds are credited to the bank by end of next day. Even at the current level, the Indian clearing and settlement system is one of the most robust globally. However, in the post board meet interaction with the press, Madhabi Puri Buch gave some indications of how the future of rolling settlements would look like.

According to Buch, the stock markets would transition to T+0 settlement system as early as the end of the current fiscal year i.e., by March 2024. That is just about 4 months away. What would that mean. It would be an improvement to the current system in that any shares bought will be credited to the demat account on the same day and shares sold will result in bank credit also by end of the day. This is likely to be an interim system for the next one year and in that time, SEBI proposes to move fully into Instant Settlement system. As the name suggests, the credit to demat and the credit to bank in the event of purchase or sale of shares will be instantaneous.

Encouraging fractional ownership of real estate

This is one of the significant changes that the SEBI has announced although it will take time to implement the same. This has been done by allowing the creation of Small and Medium REITs (SM-REITs), where the minimum asset value requirement has been reduced from Rs500 crore to just Rs50 crore. Now SM REITs can create separate schemes for owning real estate assets through special purpose vehicles (SPVs) constituted as companies. This is likely to promote and also formalize the concept of fractional ownership of real estate in India.

To be fair, fractional ownership in India is already happening and rough estimates peg the size of this informal market at around Rs10,000 crore. Fractional ownership platforms (FOPs) offer a strategy where the cost of acquisition of a unit of property is split among several investors. Unlike the REIT, where you get proportional ownership of a portfolio of realty assets, in FOP, you get part of an actual asset. What was missing was a proper regulatory structure and clarity on title deeds. These should get addressed with the leeway given to SEBI for the formation of SM REITs. The fine print of the rules is still awaited.

Regulatory framework for index providers

That was long overdue considering the growing importance of passive funds in India like index funds and index ETFs that are pegged to various indices. The idea is to foster transparency and accountability in these index providers. Index service providers play a big role in determining the inclusions and exclusions in the index. That in turn has a very big impact on the inflows and outflows into these relevant stocks and it also happens to be price sensitive information. Passive investing in India is growing at a rapid pace. Today, out of the total mutual fund AUM of Rs47 trillion, passive funds like index funds and index ETFs (both equity and debt) account for AUM of more than Rs10 trillion. That is a lot of passive money. With India likely to be included in the global debt indices, you can see a lot many index funds being formally launched in India, even on the debt side.

The focus of the regulatory framework will be on registration of index providers that license significant indices and the same shall be based on very objective criteria prescribed by SEBI. To begin with, the focus of regulation will only be on significant indices on the equity and debt side which contribute to a substantial portion of the AUM and also to the flows into passive investments in India. There is a lack of clarity on whether these index provider regulation would also cover global names like MSCI and Bloomberg. For now, the assumption is that the regulation will also cover such global indices, to the extent their indices are based on an Indian stock market benchmark. Past experience has been that regulation has fostered orderly growth and that could apply to passive funds in India too.

Greater flexibility for social stock exchanges (SSEs) in India

The concept of social stock exchanges to facilitate non-profit organizations (NPOs) to raise money through the stock exchange route, has been around for some time, but is yet to take off. One reason was that many of the rules surrounding the SSEs were relatively rigid. To simplify the rules, the SEBI has announced some key changes to the SSE regulation.

• The minimum issue size in the case of public issue size zero coupon zero principal (ZCZP) instruments has been reduced from Rs1 crore to Rs50 lakhs for NPOs looking to raise funds on the social stock exchanges (SSE). 

   

• In addition, the minimum application size in the case of public issue size zero coupon zero principal (ZCZP) instruments has also been reduced from Rs2 lakhs to just Rs10,000 for NPOs looking to raise funds on the social stock exchanges (SSE). 

   

• NPOs will be allowed to disclose their past social impact report in the fund raising document so as to add credibility to their claims. However, they would have to disclose granular details like number of beneficiaries, cost per beneficiary, administrative overheads etc.

   

• SEBI is also likely to expand the list of eligible NPOs access to the social stock exchange, by making all entities registered under Section 10 (23C) and Section 10 (46) of the Income Tax Act eligible to raise funds via the issue of ZCZPs.

Ease of compliance with protection for AIFs

Alternate Investment Funds (AIFs) are a popular channel of funds in the Indian markets. To foster greater transparency, SEBI has stipulated that any investment made by the AIF after September 2024 will mandatorily have to be in demat form only. However, the existing investments may be exempted from the ambit of these regulations under specific circumstances. Currently, the mandate for appointment of custodians for AIFs is only applicable for Category 1, 2 and 3 AIFs with corpus of more than Rs500 crore. This will now be extended to all AIFs.

To sum it up, the SEBI Board meet has covered a lot of long standing issues in the capital market regulation front. It is now over to the implementation part of the story.