Mumbai: The Securities and Exchange Board of India (Sebi) is planning to roll out a broad trading overhaul aimed at making domestic markets more accessible to global investors.
The regulator plans changes over nine months, with measures targeting collateral requirements, stock lending and derivatives.
The proposed reforms come as foreign ownership of Indian equities has fallen to a 17-year low and the rupee has declined about 6 per cent this year.
Foreign investors sold more than USD 50 billion of Indian equities between October 2024 and June 2026, while India’s weighting in the MSCI emerging-markets index has dropped below 12 per cent from a peak of 21 per cent in September 2024.
The reforms under consideration include reducing collateral requirements for trades in highly liquid stocks, according to media reports.
The move could lower upfront capital requirements by 15 per cent to 20 per cent, potentially reducing the cost of executing cash-equity trades for institutional investors.
Sebi is also looking to deepen the securities lending and borrowing market by making short-selling easier and nearly doubling the number of shares eligible for lending and borrowing.
The changes are intended to bring India’s cash-equity market closer to practices in other major Asian markets, including China, South Korea and Taiwan.
According to media reports, the regulator plans to consult industry participants before implementing the measures and give market participants time to modify their systems. Some of the changes could cause short-term disruption as brokers, exchanges and investors adjust to the new framework.
Sebi is also considering lower upfront collateral requirements for derivatives contracts with maturities beyond a year. Overseas asset managers have argued that India’s existing framework favours short-duration derivatives and makes longer-term hedging strategies less attractive.
While short-tenure contracts generally have higher liquidity across markets, longer-dated contracts in India have very limited trading activity, exchange data shows. SEBI is seeking to increase institutional participation while reducing the dominance of short-term speculative activity in derivatives markets.
Retail investors account for more than 35 per cent of trading activity in India, according to NSE data, compared with about one-fifth in the US, where institutional and professional investors account for a larger share of market volumes. The regulator has spent the past two years attempting to curb speculative retail derivatives activity after retail traders recorded losses for five consecutive years.
The reforms are also being considered against the backdrop of declining foreign participation in Indian equities. Foreign investors have sought changes to India’s trading framework to bring it closer to the systems used by other large emerging markets.
MSCI said it would monitor the reforms and assess their effectiveness through feedback from market participants during future reviews of market accessibility. It identified closing-price formation, margin and collateral efficiency, stock lending, short-selling and hedging tools as areas relevant to international institutional investors.
India’s MSCI emerging-markets weighting has fallen below 12 per cent, compared with its September 2024 peak of 21 per cent. The decline comes alongside sustained foreign selling of Indian shares, increasing the focus on whether market-structure changes can improve accessibility for global funds.
The proposed measures could make it easier for foreign institutional and passive investors to participate in Indian markets by reducing costs and frictions. However, investors said regulatory changes alone would not necessarily lead to a substantial increase in passive allocations.
Sebi is simultaneously dealing with the initial implementation of a new closing-price mechanism for stocks with derivatives contracts.
The system, designed to align India more closely with established global market practices, produced sharp volatility in the Nifty 50 during its first week as market makers and investors participated only modestly.
The regulator has continued with the new system despite the early turbulence. State Street Investment Management senior strategist Angela Lan said participation in the closing auction had initially been relatively modest, while noting that the changes could eventually reduce execution frictions for international investors.
The proposed trading reforms therefore form part of a wider effort by SEBI to deepen India’s cash markets, expand institutional participation and improve market accessibility. Their implementation will be staggered over the coming nine months, with consultations and system changes preceding the rollout. (BVI)
