Sebi Set to Introduce Key Market Reforms for Foreign Investors
The Securities and Exchange Board of India (Sebi) will soon release important proposals aimed at improving market operations. Chairman Tuhin Kanta Pandey made this announcement on Friday during a symposium on security markets.
Imminent Launch of Consultation Papers
Pandey stated that the consultation paper on foreign portfolio investor (FPI) trade netting will appear very soon. He also mentioned that the circular for the closing auction framework could be released today itself. The regulator first indicated these plans back in November.
How Netting Will Benefit FPIs
Currently, foreign portfolio investors must settle each buy and sell transaction separately. This happens even when they trade the same stock within a single day. This gross-settlement requirement forces investors to fully fund every purchase and deliver shares for every sale. It significantly increases their funding needs and transaction costs.
Allowing netting would change this completely. Investors could offset their buy and sell orders against each other. This would remove a major operational constraint for large global investors. It could make Indian markets much more attractive to institutional capital.
Closing Auction Framework to Curb Volatility
The closing auction mechanism will determine a stock's final closing price differently. It will aggregate all buy and sell orders into a single price at the end of the trading session. This framework aims to reduce end-of-day volatility. It should improve price discovery and facilitate execution of large trades through a structured session after continuous trading ends.
Focus on Deepening Corporate Bond Market
The market regulator is also pushing to expand India's corporate bond market. Pandey emphasized the need for greater retail participation. He noted that education and awareness about corporate bonds at the retail level is largely missing.
Sebi needs something like the Mutual funds sahi hai campaign to educate people about bond investments. Last week, Pandey revealed that Sebi is examining the introduction of bond derivatives. This would be a first for India.
Taxation Disparity Between Equity and Debt
On capital gains taxation, Pandey addressed the disparity between equity and debt investments. He stated that the issue lies with the central government. There is a differential in taxation treatment that may be under consideration. The Finance Ministry will take a view on this matter.
Currently, capital gains taxation differs sharply between equity and debt. Equity is treated as short term if held for up to 12 months and long term thereafter. Short-term equity gains face a 15% tax rate. Long-term gains exceeding ₹1 lakh in a financial year are taxed at 10% without indexation.
In contrast, most debt mutual funds lost long-term capital gains benefits after the April 2023 tax changes. Gains are now taxed at the investor's applicable income tax slab regardless of holding period. This makes equities relatively more tax efficient for long-term investors.
These upcoming reforms demonstrate Sebi's commitment to making Indian markets more efficient and attractive to both domestic and foreign investors.
