Financial Market Reforms and Regulation - Newspaper Summary

 The sources indicate that India's financial markets and regulatory landscape are undergoing significant adjustments, driven by both domestic policy reforms aimed at improving market structure and external shocks (such as US trade policies) that are testing the system's resilience.

Here is a discussion of what the sources say about Financial Markets and Regulation within the context of Indian Domestic Economic and Policy Reforms.

I. Stock Market Dynamics and Investment Flows

Indian financial markets exhibit mixed fortunes, with heightened volatility influenced by both global headwinds and strong underlying domestic appetite.

A. Market Performance and Volatility

• Indices and Sentiment: On Tuesday, the Nifty 50 and Sensex ended marginally lower, reflecting cautious investor sentiment amid a record low for the rupee and mixed sectoral performances. The benchmark indices experienced heightened volatility following the expiry of weekly derivative contracts.
• Sectoral Shifts: Despite the overall cautious mood, banking stocks (Nifty Bank index gained 0.41%) and auto stocks (Nifty Auto index gained 0.62%) were key contributors to the market's recovery, often attributed to the new GST regime and festive momentum. In contrast, technology stocks faced pressure due to the US government's steep hike in H-1B visa fees.
• External Impact: The Rupee plunged to an all-time low of ₹88.75/$ against the US dollar, driven by rising Foreign Institutional Investor (FII) outflows, mounting dollar demand, and the risk posed by US tariffs and the H-1B visa fee hike. Experts suggest that if the Reserve Bank of India (RBI) does not intervene, further depreciation toward the 89 or 90 level is likely.
• FII Activity: Foreign investors have been net sellers in the secondary market, contributing to FII outflows. However, they have simultaneously emerged as net buyers in Initial Public Offerings (IPOs). Weak foreign flows persist, prompting regulatory discussions to ease entry processes for overseas investors.

B. IPO Market Health and Caution

The IPO market displays volatility and potential misleading signals, necessitating regulatory scrutiny and investor caution.

• 2024 vs. 2025 Trends: The year 2024 was marked by risks, with 38.7% of listed companies trading below their issue price. 2025 has shown improvement, with only 22.2% (8 of 36 IPOs) trading at a loss.
• Misleading Oversubscription: Experts caution against relying heavily on high oversubscription levels (often ranging from 100x to 700x), especially in smaller issues. High promoter holding often results in a thin float that can distort pricing, leading investors to mistake oversubscription for quality and buy aggressively.
• Post-Listing Performance: Weaker IPOs face selling pressure from pre-IPO investors when lock-in periods end, often leading mispriced IPOs to collapse.

II. Regulatory Reforms by SEBI and RBI

The sources highlight proactive steps by the market regulator (SEBI) and the central bank (RBI) to enhance transparency, improve corporate governance, and attract international capital.

A. Strengthening Corporate Governance (RPTs)

SEBI introduced a new framework for Related Party Transactions (RPTs), effective from September 1, 2025, aimed at strengthening corporate governance and improving transparency.

• Broadened Definition: The definition of a related party has been broadened to include any entity in the promoter or promoter group, regardless of shareholding. The shareholding threshold for defining a related party has also been lowered from 20% to 10% since April 1, 2023.
• Enhanced Disclosures: The reforms emphasize the role of the audit committee, requiring them to scrutinize and approve all RPTs. SEBI has mandated the use of new, standardized disclosure templates detailing the nature, pricing terms, and rationale of the transaction.
• Impact: This enhanced transparency is expected to increase investor confidence, particularly among minority shareholders, enabling them to better evaluate transaction fairness and hold management accountable. However, smaller companies may find the compliance burden challenging, requiring robust internal controls and investment in systems.

B. Easing Entry for Overseas Investors

SEBI and RBI are engaged in advanced discussions to ease entry processes for new overseas investors in response to weak foreign flows.

• The planned changes include fewer and standardized documentation and less scrutiny for investors already regulated elsewhere.
• The goal is to reduce the time needed to register in India from nearly six months to 30-60 days, aligning with global standards.

C. Regulatory Enforcement and Penalties

The regulator has taken action against entities found to have engaged in improper market practices.

• JM Financial Settlement: SEBI settled a case with three entities of the JM Financial group over alleged irregularities in managing the public issue of non-convertible debentures (NCDs) of Piramal Enterprises.
• Consequences: The entities agreed to pay ₹3.92 crore to close the case. The settlement also involved disgorging unlawful gains and a voluntary three-month ban on certain activities, such as acting as a manager or distributor in public debt issues, and IPO financing. The original issue traced back to retail investors selling their allotments on the listing day, leading to a sharp fall in retail ownership and allegations of the group guaranteeing exit with profits.

III. Financial Sector Regulation and Innovation

Regulatory attention is focused on emerging digital financial products, the state of financial advisory, and liquidity management.

A. Digital Asset Regulation (Stablecoins)

India is urged to shift its approach to regulating digital assets, particularly stablecoins, from a "tax-first" approach to a "risk-first" regulatory framework.

• Global Context: The sources note that India risks becoming a "regulatory bystander" as other major jurisdictions, like the US (with the GENIUS Act) and Japan (with tightened crypto reforms), finalize comprehensive legal frameworks. The US law mandates high-quality liquid reserves and compulsory audits for dollar-backed stablecoins, regardless of the issuer's location, establishing global enforcement reach.
• India's Gap: India currently lacks a coherent legal regime for stablecoins, relying on patchwork tax rules and post-facto enforcement. While the RBI focuses on financial stability and the Finance Ministry handles taxation, these measures have reduced onshore liquidity and pushed trading toward offshore platforms.
• Call for Action: Stablecoins are being used for remittances and hedging against rupee volatility outside regulatory reach, potentially amplifying systemic risk. The upcoming policy paper should mandate: verifiable, high-quality liquid asset backing; clear cross-border compliance standards; real-time proof-of-reserves; and legal classification under appropriate financial codes.

B. Regulatory Pressure on Trading Activity

Regulatory tightening by SEBI, coupled with global headwinds, has deterred retail traders from the market, leading to a decline in speculative activity.

• Impact on Trading: Derivative volumes were down 28-30% in August/September, and the number of active clients on NSE decreased from 50.16 million in December 2024 to 46.1 million in August.
• Reason for Decline: The shift is attributed to SEBI tightening regulations, including increased margin requirements, larger lot sizes, and stricter risk controls, moderating speculative and short-term trading.
• Brokers' Adaptation: While regulatory changes appear stringent, industry leaders believe they are necessary to protect investors and maintain a fair system. Brokers are now focusing on the resilient profit pool of portfolio consolidation, accumulation, and robust inflows into SIPs and ETFs, catering to a maturing retail investor base seeking differentiated financial products.

C. Challenges for Registered Investment Advisers (RIAs)

Despite SEBI easing entry barriers and relaxing regulations for RIAs, their numbers have been shrinking (from 1,350 to 962).

• Deterrents: Major pain points include delays in processing applications and renewals, often without clear communication, leaving advisers in limbo. The rigorous compliance burden, including the need for a full-time compliance officer, is difficult for individual RIAs to manage financially and logistically.
• Fiduciary Responsibility: RIAs provide conflict-free, fee-based financial advice, operating under a fiduciary responsibility. The challenge is the lack of awareness and a limited "fee-paying culture" among Indian consumers.

D. Systemic Liquidity

Liquidity in the banking system swung into a deficit of ₹31,987 crore as of September 22, following surplus conditions since March-end 2025. This deficit was caused by advance tax and GST outflows.

• RBI Action: To alleviate the deficit, the RBI decided to conduct an overnight variable rate repo auction aggregating ₹1.50 lakh crore.
• Outlook: The RBI is committed to providing sufficient system liquidity. Treasury experts anticipate the system returning to a comfortable surplus of over ₹1 lakh crore in the first week of October, supported by salary credits and increased government spending.

IV. Broader Policy and Institutional Reforms

A. Capital Expenditure and Fiscal Space

The central government maintains the fiscal space and intent to increase infrastructure spending beyond the budgeted ₹11.21 trillion for FY26.

• The government has room to raise capital expenditure by ₹20,000–30,000 crore to compensate for sluggish private sector investment amid global headwinds and tariff pressure on exports.

B. MSME Dispute Resolution Reform

The MSME ministry is exploring adding powers for the Central Government to empanel private Online Dispute Resolution (ODR) firms to address delayed payments cases.

• Context: State-level facilitation councils have been slow, having yet to hear about a quarter of the 250,000+ claims raised by MSMEs.
• Goal: This proposed mechanism, following the launch of a dedicated ODR portal in June, aims to restore liquidity to MSMEs by quickly resolving disputes over payments pending for over 45 days.

C. Legal and Jurisdictional Clarity

A nine-judge Constitution bench of the Supreme Court, in an 8:1 majority verdict, ruled that Parliament does not have the legislative competence to tax mineral rights under the constitutional entry relating to mines and mineral development. This highlights ongoing legal and fiscal clarity efforts.