Veteran banker and president of the Confederation of Indian Industry (CII) Uday Kotak on Wednesday suggested four reforms to markets regulator Securities and Exchange Board of India (Sebi). His suggestions included capital adequacy-based framework for stock brokers and a focus on delivery-based customers. Kotak also suggested that the regulator consider reviewing open interest limits and ease in the areas for promoters’ reclassification under listing obligations and disclosure requirements (LODR) regulations.
Responding to Kotak, Sebi chairman Ajay Tyagi said he broadly agreed with Kotak and that the regulator would consult with all stakeholders on the same. “I broadly agree whatever you are saying. So, we will proceed and have a policy consultation with all stakeholders and see to what extent we can achieve,” Tyagi said.
Speaking at the CII Financial Markets Summit, Uday Kotak had earlier said, “Has the time come to moving towards capital adequacy based framework for stock brokers as against blunter instruments which had risk of taking one size fits all?”
Capital adequacy ratio, typically used by banks, is a measurement of a lender’s available capital with its risk-weighted credit exposures. If the suggestions made by Kotak were to be accepted, brokers will have to shore up capital and be prepared for any default. Sebi had received complaints of many broker defaults after outbreak of Covid-19. Stock broker Karvy was recently caught using client shares to avail bank loan.
Uday Kotak said Sebi should encourage delivery-based buying in the stock market. “Reforms in the securities market need to focus on fundamentally encouraging delivery-based customers, who buy on a cash basis, as the bedrock of the stock market. Therefore, we need to look at some of the frictional costs which are emerging for delivery-based customer in the market.”
He also said the derivatives market was more of a liquidity provider and catalyst for capital formation through which investors invest cash into the equity market.
On LODR guidelines for listed companies, Kotak urged Sebi to look at how it could ease areas for promoters’ reclassification. He also suggested Sebi to review open interest limits, particularly for large institutional investors, which were put in place in March 2020.
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