Pandey, who is completing his first year as the head of India’s capital markets regulator, said Sebi’s recent measures were not aimed at the entire derivatives market but at pockets of speculation in the sector. The Sebi chairman also discussed settlement regulations and promotion norms, among other issues. Edited excerpts:
You said your goal is to maintain market-friendly policies as the ecosystem evolves. Are you satisfied with the progress so far?
By and large, yes. At Sebi, there is a growing emphasis on what I would call better regulation. We know that regulation has costs and can create unintended consequences. Where multiple options achieve the same goal, we should choose the simpler option with the lowest compliance costs. Over time, regulations accumulate, increasing compliance burdens for both regulated entities and regulators. Our comprehensive regulatory review aims to rationalize and simplify this. Ultimately, investor protection and market development must go hand in hand.
In the last two years, Sebi has taken several steps to prevent excessive speculation in equity derivatives. Is there a measure or level you are targeting that you think the goal has been achieved? Do you follow a numbers-driven or principles-driven approach?
We do not follow a number based approach. Our approach is based on principles. The focus is on evaluating the impact of the measures we have introduced. Too often, financiers only highlight winners, creating an exaggerated impression of returns. By placing mass data in the public domain, we aimed to provide a realistic view of the results in the market. Transparency itself is a powerful form of investor education. We have also introduced safeguards such as tighter margin norms, especially on expiry days, to prevent lottery-like speculation. Now, we need to evaluate the impact of these steps through data, rather than month-by-month reactions. We must realize that there are also real, informed participants in the derivatives market. The aim is not to close the market, but to ensure that it operates responsibly. Next steps, if any, are guided by careful data analysis and a balanced, mature approach.
Some market participants warn that India should avoid the path taken by countries like China and South Korea, where restrictions on derivatives speculation have led to liquidity losses that are difficult to restore. Has SEBI created a risk of liquidity leaving the market as a result of these recent measures?
It is too broad to treat the entire F&O segment as a block. Derivatives play an important role in price discovery, hedging, and risk management, which is why they exist globally. Our concerns were not about the broader derivatives market, but about short-term index options, particularly weekly and intraday contracts, where speculative activity was concentrated. If there is a problem in one area, the response should address that area, not disrupt the entire system. There are many opinions on this – some argue that weekly options should remain unchanged, others warn of liquidity risks, and some recommend calculated measures such as eligibility criteria. The objective is to target concentrated risks while maintaining the overall role and liquidity of the derivatives market. So in my opinion, there is a need even for the media not to actually call it F&O, but to designate it as “O” on the expiry day and week.
So, just to be clear, your concern about derivatives is a pocket of speculation rather than a broad part.
yes. You cannot begin to spoil your body because there is a boil on your nose. There are many opinions, such as whether it should continue or let it leave the week, or we can have something in between. There are people who talk about what kind of criteria for access there might be, for example. All in all, we should be relieved that this is the right path to take. Has SEBI discussed the issue of accessibility (ability to do business) in F&O?
No, I’m not saying that. All I’m saying is it’s already different views. F&O was one of the most heated debates. I’m just saying please don’t call it F&O, and if you have a problem call the expiration date ‘O’.
There is also some concern about the rising speculation through margin trading facility (MTF) exposure. Is Sebi looking at it?
We are constantly monitoring the situation, but the MTF is already operating within the set guardrails. There are net worth requirements and leverage restrictions. We have taken the view that re-commitment of customer securities for additional leverage should not lead to excessive leverage. At this point, we believe that the MTF should be allowed to operate within these safeguards while keeping risks under control. Liquidity in the cash market is important, and we examine ways to deepen it. For example, a working group is reviewing the short sale and SLBM framework to understand barriers and encourage wider participation. Derivatives and cash markets must work together. Derivatives, especially long-term contracts, play an important role in price discovery and hedging. The key is to ensure proper position limits and risk controls so that there is more speculation and the markets remain stable.
SEBI is revising these settlement rules. While settlements have increased over time, litigation and litigation returns are high. Are further simplifications considered?
yes. There is a need for more clarity and proportionality in settlement rules. Clear rules reduce ambiguity, limit multiple interpretations, and help reduce disputes and litigation. We do not want the system to become a “judgment paradise”. Simple, clear rules ultimately strengthen market confidence.
How is SEBI rethinking the concept of promoter, specifically, the ICDR (issue of capital and disclosure requirements), after moving away from the ‘once a promoter, always a promoter’ approach?
The review is not limited to ICDR. We also examine LODR (Listing Obligations and Disclosure Requirements). A working group is gathering feedback, and recommendations will go through several committees before consultation documents are issued.
There are concerns that some companies report profits before the IPO and then revert to losses, raising accusations of window dressing. How does Sebi see it?
It is important not to generalize from a few examples. A serious case does not indicate a systemic problem. The key is to distinguish between isolated bad behavior and a wider pattern. Rushing to introduce additional regulations in response to individual cases risks additional regulations and could burden compliant companies without addressing the underlying issue.
Sebi is reportedly issuing notices to lawyers and tax advisors for privacy violations during M&A deals. Do you foresee judicial or enforcement challenges, given that they are also regulated by other professional bodies?
If the investigation finds evidence of a violation, the case goes to quasi-judicial proceedings at Sebi. A show-cause notice is issued, and the parties concerned are given an opportunity to respond and be heard before any order is passed. The results may confirm, modify, or override the research findings. These orders are subject to appeal to the Securities Appellate Tribunal.
