Sebi revamps F&O inclusion criteria, introduces fixed price delisting process

Sebi revamps F&O inclusion criteria, introduces fixed price delisting process

The Securities and Exchange Board of India (Sebi), in its board meeting held on Thursday, approved a revision in eligibility criteria for entry and exit of stocks in the derivatives segment (futures and options) of exchanges and set up an expert group to look into the F&O category.

The committee will look into the three dimensions — market development, investor protection and risk parameters, Sebi Chairperson Madhabi Puri Buch said after the board meeting.

The Sebi board also decided to introduce a fixed price process for delisting frequently traded shares and also introduced a delisting framework for investment and holding companies (IHC).

Coming down on the increasing numbers of financial influencers, or ‘finfluencers’, Sebi said that brokers and mutual funds should stop using unregulated ‘finfluencers’ for marketing and advertising campaigns.

Finfluencers are usually unregistered entities providing catchy content, information, and advice on various financial topics to their several followers. While some of them may be genuine educators, many of them are effectively unregistered and unauthorised investment advisers or research analysts who lure gullible investors into making wrong investment decisions. These finfluencers are active on Facebook, X, WhatsApp and Instagram and reel out unrealistic claims and recommendations on stock prices. The number of these unregulated finfluencers increased as the stock market witnessed a bull rally in recent months.

“The persons regulated by the board and the agents of such persons should not have any association with any other person who, directly or indirectly, provides advice or recommendation or makes any implicit or explicit claim of return or performance, in respect of or related to security or securities unless permitted by the board to provide such advice or recommendation,” Sebi said.

However, this restriction will not apply to persons regulated by the board who are exclusively engaged in investor education.

The Sebi move on F&O would weed out stocks with consistently low turnover from the segment. The eligibility criteria for entry or exit of stock should be based on the performance of stocks in the underlying cash market. The stock should continue to be chosen from among the top 500 stocks in terms of average daily market capitalisation and average daily traded value on a rolling basis, it said.

The revised criteria for entry and exit of stocks in the derivative segment (F&O) are in line with the changed market context since 2018. Under the new norms, the criteria for exit will apply to only those stocks which have completed at least 6 months from the month of entry into the derivatives segment. Under the revised criteria, average daily market capitalisation and average daily traded value (ADTV) in the previous six months on a rolling basis will be considered for top 500 stocks. The stock’s median quarter sigma order size (MQSOS) over the last six months, on a rolling basis, should not be less than Rs 75 lakh. The stock’s market wide position limit (MWPL) on a rolling basis should not be less than Rs 1,500 crore, as per the new norms.

Retail investors now make up 35 per cent of options trades, undeterred by the fact that 9 out of 10 individual traders in the equity F&O segment incurred losses.

Meanwhile, in order to protect the interest of investors and provide flexibility in the voluntary delisting framework, the Sebi board has approved the introduction of the fixed price process as an alternative to reverse book building process (RBB) for delisting of companies whose shares are frequently traded. “The fixed price offered by an acquirer should be with at least 15 per cent premium over the floor price as determined under the Delisting Regulations,” Sebi said.

“Why should we say that once you are listed you can never leave... this isn't Hotel California,” Buch said.

Sebi also proposed introduction of an alternate delisting framework for listed investment holding companies (IHC) through scheme of arrangement by way of selective capital reduction. A listed IHC should have at least 75 per cent of their fair value (net of liabilities) comprising direct investments in equity shares of other listed companies. It will be permitted to transfer the underlying equity shares held by it in other listed companies to its public shareholders proportionately, it said.

The regulator also modified the counter-offer mechanism in the case of delisting through the RBB process. It has allowed reduction in threshold for making a counter-offer from existing 90 per cent to 75 per cent provided that at least 50 per cent of public shareholding has been tendered.

In order to facilitate ease of doing business for foreign portfolio investors, the Sebi board approved a proposal to exempt university funds and university related endowments, registered or eligible to be registered as Category I FPI, from additional disclosure requirements prescribed under SEBI’s August 24, 2023 circular.

Providing operational flexibility to Alternative Investment Funds (AIFs), the board approved a proposal to expressly permit Category I and II AIFs to borrow for a period of up to 30 days for the purpose of meeting temporary shortfall in drawdown from investors while making investments.

Further, the regulator cleared a proposal to remove financial disincentives for MD and CTO of exchanges, and other market infrastructure institutions (MIIs) in the case of a technical glitch.

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