The most important decision coming out of Wednesday’s meeting of the Securities and Exchange Board of India (SEBI) was the one to exempt buyers of debt-laden companies from making an open offer or preferential issue. The move indicates welcome coordination between regulators in the matter of resolving the biggest issue facing the economy now. Currently, only lenders are exempt from the open offer requirement whenever they take a controlling stake in the listed borrower. Henceforth, investors who step up to acquire equity in a distressed company from the lender would also be exempt from the provisions of the Takeover Code. This is a big step that will make it just that bit easier for lenders when they set out to find prospective investors who can buy the stressed asset and turn it around. The investor will not have to spend on acquiring equity from other shareholders and can instead divert the resources to turn around the stressed asset.
The equity derivative segment needs urgent attention with signs of over-heating evident in the turnover numbers. Average daily traded volume in the derivative segment of the NSE has increased 50 per cent between December 2016 and May 2017. The point of concern is that the volume in futures and options, where smaller investors typically trade, has doubled in this period. There are some structural flaws as well. The derivative market for equities dominates the spot market with over 80 per cent share in overall turnover. Within the derivative segment, trading is mainly in index options, with other segments accounting for just one-fifth of the derivative turnover. This concentration of volume in index derivatives is not a healthy signal as it implies lack of depth. It is just as well that SEBI has now said it will hold talks on the current derivative market framework.
SEBI’s move to allow category III alternative investment funds into the commodity market is a judicious one. With the launch of commodity options, increasing the users of this instrument is an imperative. Since hedge funds employ complex strategies involving spot and derivative market across asset classes, allowing entry to these investors could boost volume in this segment. An area where the regulator needs to tread with care is in making changes to laws governing foreign portfolio investors. The Board has stated that the access norms for foreign investors will be eased by allowing entry to investors from countries with whom India has diplomatic ties and by simplifying and rationalising the eligibility criteria for FPIs. With foreign funds continuing to flow into the stock market at a rapid rate, there does not seem to be any need for the regulator to ease the existing norms any further. It is also contrary to the regulator’s recent moves to rein in speculative fund flows and round-tripping of funds.