India’s Market Regulator Plans New Rules to Protect Investors
India's markets regulator, the Securities and Exchange Board of India (SEBI), is planning to introduce new rules to ensure safer trading practices and prevent market manipulation. Two sources with direct knowledge of the matter said these changes are expected to be discussed at SEBI's board meeting on Thursday. The sources requested anonymity as they are not authorized to speak to the media.
Tighter Rules for Stock Derivatives
Earlier this month, SEBI released a discussion paper emphasizing the need for sufficient liquidity and trading interest for stock derivatives. Stock derivatives are complex financial instruments whose value is derived from the underlying asset, like stock options. Stock options enable investors to buy or sell a security at a predetermined price in the future.
Example: Imagine stock options as a "pre-booking" of shares at today's price, which you can buy or sell later. If you pre-book shares at ₹100, you can choose to buy them even if the price rises to ₹150 later.
Background on Stock Derivatives
In the fiscal year 2023-24, the notional value of options—which essentially refers to the value if you exercised all options—more than doubled to $907.09 trillion. Most of these options were traded on index option contracts, which bundle many stocks together, making them less risky. Although SEBI hasn't taken steps to regulate index options yet, they are considering some technical tweaks, according to Reuters.
Stopping Fake Financial Influencers
With a boom in retail investors during the COVID-19 pandemic, many unregistered financial influencers started offering financial advice on social media. SEBI wants brokers and mutual funds to avoid associating with these unregistered influencers to protect investors from misleading information.
Example
Example: If a housewife starts investing in stocks based on advice from an unverified influencer on YouTube, she might face unexpected losses. SEBI's new rules aim to prevent such risks.
Ensuring Safe Investing
SEBI has also formed a group consisting of exchanges, brokers, and mutual funds. This group is tasked with suggesting additional changes needed to reduce manipulation risks and protect retail investors, especially in options contracts.
Example: If a company manipulates its stock price to artificially inflate demand, retail investors might buy at high prices and suffer losses when the price comes down.
Changes to Delisting Rules
SEBI's board will also consider making it easier for companies to delist—or exit—from stock exchanges. Delisting refers to the removal of a listed company's stock from a stock exchange, which can impact shareholders.
Example: If a small company with limited growth potential gets delisted, its shares can't be traded in the stock market anymore, affecting existing shareholders.
By tightening rules and focusing on investor protection, SEBI aims to ensure a fair and transparent market where investors can trade with confidence.
