Sebi bets on trading reforms to reverse foreign capital flight

India's markets regulator, the Securities and Exchange Board of India (SEBI), is planning to overhaul decades-old rules aimed at reversing foreign capital flight and increasing the country's weightage in global stock market indexes. The reforms, which are expected to be finalized soon, will address practical issues faced by investors and potentially boost India's standing in global market indices.

Key changes include lowering collateral requirements in cash equities, encouraging longer-dated derivatives, and nearly doubling the number of shares eligible for lending and borrowing in the cash equities market. SEBI plans to implement these changes within nine months, following consultations with industry stakeholders to allow time for adjustments.

Foreign ownership of Indian stocks has reached a 17-year low, and the rupee has been performing poorly, ranking among Asia's worst performers. The reforms are being considered to help India align with major regional markets such as China, South Korea, and Taiwan, which already have mature securities lending and borrowing arrangements.

The regulator is also looking at reducing upfront collateral requirements for derivatives contracts expiring after a year and cutting collateral requirements for trades in highly liquid stocks, which could reduce capital by 15% to 20%. SEBI is considering these measures based on feedback from overseas asset managers who have expressed concerns about the current system favoring weekly derivatives contracts and discouraging longer hedging strategies.

The reforms aim to boost liquidity, deepen institutional participation, and make it easier for global investors to translate their interest in India into long-term investments. While some reforms may face implementation challenges, SEBI remains committed to navigating the process and ensuring market adaptability, ultimately fostering a more conducive environment for international institutional investors.