Sebi’s World-Firsts Overshadowed by Market Flaw

• Sebi tests T+0 settlement after T+1 success, aiming for efficiency.
• Buch stresses faster settlements to compete with cryptos, targeting youth.
• Sebi Chair encounters legal setbacks, prompting investigative scrutiny.

India’s capital markets have taken major strides in enhancing efficiency and accessibility.

Following the successful implementation of a one-day trade settlement (T+1), Sebi recently began the test phase of same-day settlement (T+0). Moreover, the regulatory body plans to roll out instant settlement (T) into the market by next year.

According to Bloomberg reports, the move towards faster settlements aims to “improve capital efficiency” and curb “counterparty risk.” Sebi Chairperson Madhabi Puri Buch highlighted that the defect rate of settlements has already halved from about 0.8% to 0.4% after implementing T+1.

The transition may pose challenges for stakeholders, including local brokers and foreign funds. These market participants may need to adapt transaction processes and payments across different time zones. 

Nonetheless, Buch believes this move will compel regulated markets to cater to the demand for instant transactions. Otherwise, they could lose ground to unregulated alternatives like cryptocurrencies, which offer immediate execution and tokenization.

In addition to facilitating faster settlements, Sebi is also focused on democratizing investment opportunities. The regulatory body particularly targets India’s younger demographic and lower-income households. 

It aims to align with the preferences of a generation that prefers bite-sized consumption while encouraging financial inclusion. This has prompted the push for initiatives such as fractional shares, REITs, InvITs, and SIPs.

Moreover, India has taken a significant step towards social impact investing by establishing the Social Stock Exchange. On this note, it joins a select group of countries that offer a platform for social enterprises to raise funds. 

Although in its infancy, the exchange has witnessed five listings, with non-profits raising approximately 80 million rupees ($960,000) through zero-coupon, zero-principal bonds for various projects. This includes rural youth employment and environmental conservation efforts in the Sundarbans mangroves.

Furthermore, investors will soon be able to easily support social causes through online trading platforms like Zerodha. However, despite these advancements, Sebi’s enforcement challenges linger. Per Bloomberg, “Without it, the regulator is nothing but a paper tiger.”

The Sebi chairperson encountered setbacks in major legal battles last year. This included courts overturning their rulings due to factors such as insufficient evidence, delayed prosecution, or excessive penalties and disgorgements. 

MS Sahoo, who has held key roles across regulatory bodies, attributes this to differing investigative approaches. “Sebi builds cases in an inquisitorial fashion, courts test them on adversarial grounds,” he stated.

Meanwhile, former Sebi official Sumit Agrawal, now founder of Regstreet Law Advisors, highlights that 

The concern lies not in Sebi’s losses in high-profile cases, which may traverse uncharted legal territory, but in the repeated divergence from established legal principles that courts have also pointed out.

Arvind Chari, Chief Investment Officer of Q India (UK), emphasized the potential for increased foreign investment in India, estimating inflows of up to $3 trillion across asset classes over the next decade. 

Chari opined that India must develop comprehensive policies, regulations, investment frameworks, and legal structures to capitalize on this opportunity. However, he questioned the regulatory body’s readiness to accommodate such substantial inflows, asking, “Is Sebi ready?”