SEBI’s Game-Changing Proposals to Reshape The Stock Market

The Securities and Exchange Board of India (SEBI) has recently proposed several significant changes aimed at streamlining the fundraising process for companies and enhancing investor protection. These proposals are expected to reshape the Indian stock market landscape, promoting efficiency and stability.

Merging Rights Issues and Preferential Allotments

Once a company is listed, it can raise additional capital through a rights issue, Qualified Institutional Placement (QIP), or preferential allotment. These follow-on offerings are particularly sensitive to market timing due to the continuous fluctuation in stock prices. SEBI has proposed to streamline these processes by combining rights issues and preferential allotment using a simple two-page document. This innovation will significantly reduce the end-to-end timeline from 42 days to 23 days, making the fundraising process more efficient.

In FY 24, equity issuance via rights issues was approximately ₹15,110 crore, while preferential allotments amounted to around ₹45,100 crore. Streamlining these processes is crucial for the market, allowing companies to raise funds more effectively.

Traditionally, a rights issue allows current shareholders to buy additional stock at a discount, while a preferential allotment involves issuing shares to a select group of investors outside the existing shareholder base. This move will enable companies to allocate shares preferentially to new investors if part of the rights issue remains unsubscribed.

Enhancing Scrutiny and Reducing Malpractice

SEBI increased its scrutiny of issue documents filed by companies going public. The regulator has been actively working towards curbing malpractice in initial public offering (IPO) subscriptions and making disclosures simpler for investors. These efforts are crucial in light of the rising number of IPOs in the Indian market.

Streamlining the IPO Process

Filing for an IPO in India involves submitting a Draft Red Herring Prospectus (DRHP) to SEBI, meeting extensive disclosure requirements, obtaining in-principle approval from stock exchanges, and addressing SEBI’s observations. This entire process typically takes 60 to 90 days after the initial DRHP submission.

SEBI plans to templatise the DRHP while also leveraging AI to streamline the approval process, reduce costs, and expedite listing. Additionally, SEBI is tailoring disclosure requirements of key performance indicators for startups to ensure uniform reporting in listing documents. This initiative will ensure that public offer documents are concise and easily comprehensible, facilitating informed investment decisions.

Proposed Changes to Derivatives Trading Framework

SEBI has also proposed seven key amendments to the derivatives trading framework to enhance investor protection and market stability. These include limiting options strike prices, upfront collection of options premiums, increasing minimum contract sizes, reducing weekly expiries, increasing contract margins near expiry, intraday monitoring of position limits, and rationalising contract strikes.

If enacted, these changes could lead to reduced trading volumes on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), potentially affecting their profitability. However, the focus is on curbing speculative trading and protecting household savings, which could be more productively deployed in IPOs, mutual funds, or other economic activities.

Conclusion

If enacted, SEBI’s proposed changes would enhance the efficiency and stability of the Indian stock market. By streamlining fundraising processes, simplifying public offer documents, and curbing speculative trading, SEBI aims to create a more robust and reliable trading environment. Stakeholders, including investors, exchanges, and brokers, will need to adapt to these changes to ensure compliance and maintain market integrity.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.