Reforms by SEBI: A Game Changer for India’s Capital Markets

Reforms by SEBI: A Game Changer for India’s Capital Markets

“Foreign Portfolio Investors can now benefit from SEBI’s new single-window registration process.”

The Securities and Exchange Board of India recently introduced a series of strategic reforms aimed at bolstering the country's capital markets and attracting large-scale investments. These reforms span a wide range of areas, from initial public offerings (IPOs) to foreign portfolio investors, and even the structuring of anchor investors. Together, these measures underscore SEBI's commitment to enhancing market liquidity, reducing compliance burdens, and ensuring greater participation from both domestic and foreign investors.

Eased IPO Norms to Boost Market Liquidity

One of the most significant changes approved by SEBI is the relaxation of the minimum dilution requirements for IPOs. Historically, large companies faced significant challenges in listing due to the stringent requirements for minimum public offerings (MPOs) or dilutions. To encourage more large companies to go public, SEBI has lowered the threshold, thus making IPOs more attractive and feasible for companies with substantial market capitalizations.

For companies with a post-issue market capitalization above ₹5 trillion, the minimum offering will be ₹15,000 crore or at least 1% of mcap, with a prescribed minimum dilution of 2.5%. Similarly, for companies with an mcap between ₹1 trillion and ₹5 trillion, the minimum public offering will be ₹6,250 crore along with a dilution of 2.75%. These revisions are expected to incentivize companies to list in India, which could result in increased liquidity and more investment opportunities for market participants.

Additionally, the new norms introduce a more lenient approach for companies with public shareholding below 15% at the time of listing. These companies will now have up to five years to meet the 15% public shareholding requirement and a total of 10 years to fulfil the mandated 25% minimum public shareholding.

Changes in Anchor Investor Framework

In an effort to further diversify the investor base in IPOs, SEBI has introduced changes to the anchor investor framework. Historically, anchor allocations were limited to domestic mutual funds. However, with the new reforms, life insurers and pension funds are now eligible to participate in the anchor investor category. This move is designed to channel long-term investments into India’s IPO market, thereby improving the stability of listed stocks.

The overall anchor investor reservation has been increased from one-third to 40%, with one-third still reserved for domestic mutual funds. The remaining portion is now open for life insurers and pension funds, which can bring in more stability and long-term investment to the market. This step is expected to foster deeper institutional participation, enhancing the attractiveness of IPOs to a wider set of investors.

Reforms for Foreign Portfolio Investors

To simplify the onboarding process and ease the compliance burden for FPIs, SEBI has approved the launch of a single-window framework known as SWAGAT-FI. This platform will significantly reduce the documentation requirements for low-risk FPIs, such as sovereign wealth funds and government-related investors, as well as regulated public funds like mutual funds, insurance companies, and pension funds.

Furthermore, SEBI has introduced a more investor-friendly approach by slashing the Know Your Customer (KYC) process and setting a one-time KYC fee of $2,500 for a 10-year block, as opposed to the previous three-year cycle. This change is expected to cover more than 70% of FPIs, simplifying registration for a wide array of investors. Additionally, FPIs will now be exempt from the 50% aggregate contribution cap applicable to Non-Resident Indians (NRIs) and Overseas Citizens of India. For the first time, SEBI has also allowed retail schemes in the GIFT-IFSC (Gujarat International Finance Tec-City International Financial Services Centre) to register as FPIs, opening up more avenues for retail participation in international markets.

Introduction of Scale-Based Thresholds for Related Party Transactions

SEBI is also introducing new thresholds for material related party transactions based on the turnover of listed companies. This revision will reduce the number of transactions requiring shareholder approval, streamlining corporate governance processes and improving operational efficiency for companies.

Regulation of Real Estate Investment Trusts and Infrastructure Investment Trusts

Another crucial reform includes SEBI’s decision to reclassify Real Estate Investment Trusts as “equity” for mutual funds, making them eligible for inclusion in equity indices. This move is likely to attract more institutional investors to REITs, thereby boosting liquidity in this segment of the market.

However, Infrastructure Investment Trusts will not benefit from the same reclassification and will continue to be categorized as “hybrid.” Despite this, SEBI has expanded the definition of “strategic investors” in both REITs and InvITs, now including provident funds, public financial institutions, Alternative Investment Funds, and state industrial development corporations. This expansion of investor categories is expected to enhance the long-term investment potential in these alternative investment structures.

Capping Exit Load and Other Mutual Fund Reforms

In the mutual fund space, SEBI has capped the maximum exit load at 3%, down from the previous limit of 5%. This reform is expected to reduce the financial burden on investors and encourage more market participation. Additionally, SEBI has reintroduced incentives for distributors who generate new inflows from beyond the top 30 cities, further promoting inclusive investment across the country.

Expansion of SEBI’s Reach with Regional Offices

In line with its efforts to make capital markets more accessible to a broader population, SEBI has decided to expand its nationwide presence. New regional offices will be established in state capitals to improve outreach and ensure better compliance and regulation at the local level.

SEBI’s latest series of reforms is a bold step toward enhancing the competitiveness and attractiveness of India’s capital markets. By making it easier for both domestic and foreign investors to participate, simplifying regulatory requirements, and fostering the growth of large-scale listings and institutional investments, these changes are expected to significantly boost investor confidence and contribute to long-term market stability. If these reforms are successfully implemented, they could position India as a global leader in capital market innovation, making it an even more attractive destination for both foreign and domestic investment.