SEBI Chairman Ajay Tyagi on Wednesday said that the regulator was aware about the issue of stock exchanges holding lower cash in investor protection fund (IPF), especially in the light of rising broker defaults.

He said that SEBI would take measures to ensure that the situation does not take an ugly turn. He further stressed that SEBI was also working on improving cash market and delivery-based volumes and had already taken several measures.

Tyagi was talking at a virtual conference organised by the Confederation of Indian Industries to discuss the reforms in Indian financial markets.

Also read: SEBI spells out role of investment committees in AIFs

“I agree, IPF is woefully insufficient and we have examined would be soon taking action in consultation with exchanges to increase the fund. It is much much less. We will not at all allow that to be a criteria for delaying brokers as defaulters (by stock exchanges). That is certainly not on. Recently, we have reviewed all the broker defaults that have taken place extensively. In fact, we will soon be taking corrective actions. I can assure you of that,” Tyagi said in response to a question from BusinessLine .

The BSE has ₹784 crore and the NSE has ₹594 crore in the IPF corpus.

Broker defaults seen

More broker defaults have been witnessed in the derivatives segment. SEBI is flooded with complaints of brokers having diverted client money to futures and options trade. After their bets went wrong it led to defaults on client money. However, stock broker Karvy, who has been one of the largest brokers in recent times to have defaulted on client money, was caught using client shares to avail bank loan.

Though SEBI ordered reversal of client shares, still there are complaints pending and dues pending against the broker. Stock exchanges have not clarified if Karvy is a defaulter or has cleared all the outstanding client payments, sources close to SEBI said. There are other broker defaults where dues run into several hundreds of crore.

Delivery-based cash market volumes

At the start of the summit, Uday Kotak, President, CII stressed on the need to increase the delivery-based cash market volumes. As of now, the cash market and especially delivery-based trading volumes in Indian markets are extremely poor. Around 85 per cent of the total equity market turnover on the NSE and the BSE is in the derivative segment. Nearly a decade ago the cash market volumes were more than 30 per cent.

How will SEBI bring delivery-based cash markets on par with derivatives?

“In the derivatives markets, we have put physical delivery as one of the criteria and over a period of time that is being implemented. That was with a view to reduce speculation. In the cash market also, with introduction of intra-day margin and introduction of upfront margin That too will reduce the speculation. But this issue needs further looking into and we will do it,” said Tyagi.

On corporate bond market

During his speech, Tyagi stressed on the need for high consultation among regulators (hint was towards RBI) to improve the corporate bond market.

“The financial sector in India is dominated by bank lending. This needs urgent diversification by facilitating fund raising through capital markets, especially considering the well-known problems with the banking sector. Also, some investments are best funded through the capital markets. For instance, it would be a challenging task to achieve the government’s target of having ₹100-lakh crore investments in infrastructure by 2024-25 unless the bond market is adequately developed,” Tyagi said.

In his view, the fund raising, both equity and debt combined, through capital markets in the last 2-3 years has averaged around ₹9-9.5 lakh crore per year. Though it sounds impressive, Tyagi said the same needs to ramp up considering the needs of a developing economy.

On the FPI front, Tyagi said India received around $11 billion of net FPI investments in the equity markets in this financial year till date. Interestingly, while most of the Emerging Markets including Brazil, Taiwan, South Korea, Thailand, South Africa and Malaysia have witnessed FPI outflows in 2020 so far. India has witnessed net FPI inflows during the same period.

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