SEBI to Overhaul F&O, Short-Selling, and Buyback Regulations to Enhance Market Liquidity
Securities and Exchange Board of India Chairperson Tuhin Kanta Pandey has unveiled an ambitious reform agenda aimed at deepening market liquidity and strengthening India's capital markets infrastructure. Speaking at the CNBC-TV18 Global Leadership Summit 2025 on Thursday, Pandey emphasized that India's capital markets have evolved from being merely a reflection of economic growth to becoming an integral pillar supporting the nation's development aspirations.
Capital Markets as Central to Viksit Bharat Vision
The SEBI chief articulated a vision where capital markets serve as fundamental enablers of India's economic ambitions. "Capital markets are not just a barometer of the economy, but central to the aspirations of Viksit Bharat," Pandey declared, highlighting the critical role financial markets play in achieving the Developed India goal by 2047.
He noted that India's economy continues to demonstrate remarkable growth and resilience, with capital markets positioned to fuel the country's next phase of expansion through improved regulations, enhanced transparency, and greater accessibility.
Robust Primary Market Performance
Pandey highlighted the strength of India's primary markets, noting that nearly ₹2 lakh crore has been raised from public issues during the current year alone. This substantial capital mobilization underscores investor confidence and the attractiveness of Indian equities for both domestic and international participants.
The SEBI chief assured that the regulator would continue streamlining the capital-raising process to make markets faster, more transparent, and more inclusive for all stakeholders including retail investors, institutional players, and issuers.
Comprehensive Review of Derivatives Framework
One of the major announcements centered on a forthcoming overhaul of the derivatives regulatory framework. Pandey revealed that SEBI will soon unveil a new options framework aligned with global standards while being tailored to India's specific market characteristics and participant needs.
"Derivatives play a vital role in price discovery," the SEBI chief emphasized, adding that the regulator's approach to futures and options would remain calibrated and data-driven. A detailed discussion paper on this framework will be released shortly, inviting stakeholder feedback before implementation.
Pandey acknowledged that the introduction of weekly F&O settlements has brought greater certainty to market participants and will continue under close regulatory supervision to ensure market stability while providing flexibility to traders.
Strengthening Short-Selling and Securities Lending
Recognizing the need to enhance market depth and efficiency, Pandey announced that SEBI will conduct a comprehensive review of India's short-selling mechanisms and the Securities Lending and Borrowing Mechanism (SLBM). He acknowledged that these frameworks remain underdeveloped compared to global counterparts, limiting market liquidity and price discovery efficiency.
Short-selling allows investors to profit from declining stock prices and serves as an important risk management tool. A more robust framework would enable better price discovery, improved market efficiency, and enhanced hedging capabilities for institutional and retail investors alike.
Buyback Norms Under Regulatory Scanner
The SEBI chief also indicated that the regulator would review existing buyback norms to ensure greater transparency and bolster investor confidence. Share buybacks have become an increasingly popular method for companies to return value to shareholders, and enhanced regulations would ensure these transactions are conducted fairly and transparently.
This review comes at a time when several Indian companies have announced substantial buyback programs, making regulatory clarity and investor protection increasingly important.
Untapped Potential of Mutual Funds
Describing mutual funds as a "huge untapped lever," Pandey highlighted that India's mutual fund assets under management remain below 25% of GDP, significantly lower than global averages. This represents a substantial growth opportunity for the industry and the broader financial ecosystem.
While awareness of mutual funds has improved considerably in recent years, actual participation continues to lag, particularly in rural areas. The SEBI chief revealed a stark disparity: "Urban participation in securities markets stands at 15%, compared with just 6% in rural India."
This participation gap underscores the need for enhanced financial literacy initiatives, improved distribution networks, and simplified investment processes to bring more Indians into the formal investment ecosystem.
Domestic Capital: A Deep Well Ready for Deployment
Pandey emphasized the strength of India's domestic capital base, describing it as "a deep well waiting to be deployed." He pointed to the rising contribution of household savings and growing institutional participation as key drivers of market liquidity and resilience.
India's household savings, traditionally parked in physical assets like gold and real estate, are gradually shifting toward financial instruments. This trend, if sustained and accelerated, could provide substantial long-term capital for economic growth and entrepreneurship.
Balancing Regulatory Costs and Market Development
Addressing concerns about regulatory costs and compliance burden, Pandey articulated SEBI's philosophy of seeking "optimum regulation" – neither too restrictive nor too lenient – to keep India's markets future-ready and competitive globally.
Regarding expense ratio caps for mutual funds, he clarified: "The cap is a cap - it's a ceiling. We are discussing whether that ceiling is too low. But transparency in costs remains non-negotiable." This statement suggests potential flexibility in expense structures while maintaining the core principle of investor protection through cost transparency.
Bond Market Deepening and Corporate Governance
Pandey underscored the importance of further developing India's bond market, which remains relatively shallow compared to equity markets. A deeper bond market would provide companies with alternative funding sources beyond bank loans and equity, while offering investors fixed-income investment options.
On corporate governance, the SEBI chief announced that the regulator would soon review the Listing Obligations and Disclosure Requirements (LODR) framework to enhance transparency standards among listed companies. Stronger disclosure norms would improve investor confidence and ensure better information symmetry in the market.
Key Reform Areas at a Glance
SEBI's planned reforms cover multiple critical areas:
- Derivatives Framework: New options framework aligned with global standards, discussion paper coming soon
- Short-Selling: Comprehensive review to develop robust mechanisms comparable to international markets
- Securities Lending: Enhancement of SLBM framework to improve market depth
- Buyback Regulations: Review to ensure greater transparency and investor protection
- Mutual Funds: Initiatives to increase penetration, especially in rural areas
- Expense Ratios: Discussion on appropriate ceilings while maintaining cost transparency
- LODR Framework: Review to strengthen corporate governance and disclosure standards
- Bond Market: Measures to deepen the corporate bond market
Global Standards with Indian Context
A recurring theme in Pandey's address was the balance between adopting global best practices and tailoring regulations to India's unique market characteristics. This approach recognizes that while international standards provide valuable benchmarks, India's large retail investor base, diverse market participants, and specific economic conditions require customized regulatory frameworks.
Market Implications
The announced reforms signal SEBI's proactive approach to evolving India's capital markets infrastructure in line with the country's growing economic stature. For market participants, these changes promise:
- Enhanced liquidity through improved short-selling and securities lending mechanisms
- Better price discovery via refined derivatives frameworks
- Increased transparency in buybacks and corporate disclosures
- Greater market access particularly for rural investors
- Improved risk management tools for institutional and retail investors
Future-Ready Markets
Concluding his address, Pandey expressed confidence that "with reform and resilience as our guiding principles, India's markets are well-positioned to fund the country's ambitions." This statement reflects SEBI's commitment to balancing innovation with stability, growth with protection, and accessibility with sophistication.
The reform roadmap outlined by the SEBI chief suggests a regulator attuned to both global developments and domestic requirements, positioning India's capital markets to play an increasingly central role in the nation's economic transformation journey toward Viksit Bharat by 2047.
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