Relaxation from compliance with certain provisions of the SEBI (LODR) Regulations, 2015

SEBI, vide circular dated October 7, 2023, “Limited Relaxation from Compliance with Certain provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, (“LODR Regulations”), had relaxed the applicability of Regulation 36(1)(b) of the LODR Regulations for Annual General Meetings (AGMs) and Regulation 44(4) of  the LODR Regulations for general meetings (in electronic mode) held till September 30, 2024 based on the relaxations provided by MCA vide General Circular no. 09/2023 dated September 25, 2023, “Clarification on hording of Annual General Meeting (AGM) and EGM through Video Conference (VC) or other Audio Visual Means”. Recently, MCA, vide General Circular No. 09/2024 dated September 19, 2024, “Clarification on hording of Annual General Meeting (AGM) and EGM through Video Conference (VC) or other Audio Visual Means” has extended the relaxation from sending physical copies of financial statements (including Board’s report, Auditor’s report or other documents required to be attached therewith) to the shareholders, for the AGMs conducted till September 30, 2025. SEBI has also received representations to extend the relaxations mentioned at para 1 above.

In view of the above, it has been decided to extend the relaxations mentioned above till September 30, 2025. It is reiterated that the listed entities shall ensure the following compliance while availing the relaxations specified above: –

1. In terms of regulation 36(1)(c) of the LODR Regulations, listed entities are required to send hard copy of full annual reports to those shareholders who request for the same.
2. The notice of AGM published by advertisement in terms of regulation 47 of the LODR Regulations shall disclose the web-link to the annual report so as to enable shareholders to have access to the full annual report.

Facilitation to SEBI registered Stock Brokers to access NDS – OM for trading in G-Sec – SBU

 To encourage retail participation in Government Securities (G-Secs), it has been decided that SEBI-registered stock brokers may engage in the G-Secs market through the Negotiated Dealing System – Order Matching (NDS-OM) of the relevant regulatory authority. This participation will take place under a Separate Business Unit (SBU) within the stock broking entity. The regulatory framework, including policies on eligibility, risk management, investor grievances, inspections, enforcement, and claims for stock brokers transacting on NDS-OM, will be governed by the respective regulatory authority. All operations of the SBU facilitating trading on NDS-OM will fall under the jurisdiction of that authority.

To ensure clear separation of responsibilities and safeguard the interests of both stock brokers and their NDS-OM activities, the following key measures are being established:

1. The NDS-OM activities conducted by the SBU must be segregated and ring-fenced from the stock broker’s securities market-related activities, ensuring an arms-length relationship between them.
2. The SBU will be dedicated solely to transactions on the NDS-OM.
3. Stock brokers must maintain a separate account for the SBU on an arms-length basis.
4. The net worth of the SBU should be distinct from the net worth of the stock broker in the securities market. The stock broker’s net worth requirements must be met after excluding the SBU’s account.

Since the SBU’s activities will be regulated by a different authority, investors using the SBU’s services will not have access to the Grievance Redressal Mechanism, Investor Protection Fund (IPF) of stock exchanges, or SCORES.

Measures to Strengthen Equity Index Derivatives Framework for Increased Investor Protection and Market Stability

 The derivatives market plays a crucial role in price discovery, improving liquidity, and helping investors manage risk. Stock Exchanges and Clearing Corporations collaborate to provide trading platforms, ensuring effective risk management, surveillance, and smooth settlement processes. These functions are essential to maintaining market integrity, especially with recent trends like increased retail participation, short-term index options, and high trading volumes on expiry days.

Regulation 28(2) of the SECC Regulations, 2018, identifies Risk Management, Surveillance, and Product Development as core functions of Stock Exchanges and Clearing Corporations, while Clearing and Settlement are key responsibilities for Clearing Corporations. Under the SEBI Act, 1992, SEBI is tasked with protecting investors, promoting market development, and regulating Stock Exchanges. To review and strengthen the regulatory framework for investor protection in the derivatives market, SEBI formed an Expert Working Group (EWG) to recommend measures for improving market stability and supporting stock exchanges in their core functions.

Following the recommendations of the Expert Working Group (EWG) and discussions within SEBI’s Secondary Market Advisory Committee (SMAC), SEBI released a consultation paper on July 30, 2024, concerning the equity index derivatives framework. After considering feedback and conducting further discussions with Stock Exchanges and Clearing Corporations, SEBI has decided to implement measures aimed at enhancing and strengthening this framework:

Upfront collection of Option Premium from options buyers 

To address the non-linear pricing and significant implicit leverage associated with options, it has been decided that Trading Members (TMs) and Clearing Members (CMs) must collect the options premium upfront from option buyers. Additionally, Clause 14.3 of SEBI’s Master Circular mandates TMs to collect Initial Margin (IM) and Extreme Loss Margin (ELM) upfront, which will now also include the net options premium at the client level. This change will be monitored through intraday snapshots by Clearing Corporations to ensure compliance. The new requirement will take effect in the equity derivatives segment on February 1, 2025.

Removal of calendar spread treatment on the Expiry Day

1. Expiry days carry significant basis risk, leading to the decision that calendar spread benefits will not apply to contracts expiring on the same day. This aligns with the cross-margin framework for correlated indices.
2. On expiry days, the worst-case scenario loss will be calculated separately for expiring contracts and others, and additional calendar spread margins will not be required for those contracts. The Extreme Loss Margin (ELM) for calendar spread positions in futures will also be calculated without considering the expiring position as part of a calendar spread.
3. Margin calculations for calendar spread positions will remain unchanged for contracts expiring on other days. These changes will come into effect for equity index derivatives on February 1, 2025.

 Intraday monitoring of position limits

1. Currently, SEBI’s position limits for index derivatives are monitored by Stock Exchanges and Clearing Corporations at the end of the day. To address the risk of undetected intraday positions exceeding permissible limits, it has been decided that position limits for equity index derivatives will also be monitored intraday.
2. Stock Exchanges will take a minimum of four random position snapshots throughout the day, with the exact number determined by each exchange. This measure will take effect on April 1, 2025, and the existing penalty structure for end-of-day position limit breaches will also apply to intraday breaches.

 Contract size for index derivatives

1. SEBI’s Master Circular specifies that the contract size for index futures and options must be between Rs. 5 lakhs and Rs. 10 lakhs, a limit set in 2015. Due to a threefold increase in market values since then, it has been decided that new derivative contracts must have a minimum value of Rs. 15 lakhs at the time of introduction, with the lot size adjusted to ensure the contract value falls between Rs. 15 lakhs and Rs. 20 lakhs.
2. Other provisions regarding contract size will remain unchanged. This adjustment aims to maintain suitability and appropriateness criteria for participants, considering the inherent leverage and risks of derivatives. The new measure will apply to all index derivatives contracts introduced after November 20, 2024.

Rationalization of Weekly Index derivatives products

1. Trading in index options on expiry days is often speculative, particularly when option premiums are low. SEBI’s consultation paper highlighted hyperactive trading on these days, with average position holding periods of just minutes and increased volatility in index values, raising concerns about investor protection and market stability without benefiting sustained capital formation.
2. To address excessive trading in index derivatives on expiry days, SEBI has decided to rationalize the products offered by exchanges, allowing each exchange to provide derivatives contracts with weekly expiry for only one benchmark index. This measure will take effect on November 20, 2024.

 Increase in tail risk coverage on the day of options expiry

1. To address heightened speculative activity and associated risks on options contracts expiry days, SEBI has decided to increase tail risk coverage by imposing an additional Extreme Loss Margin (ELM) of 2% on short options contracts.
2. This additional margin will apply to all open short options at the beginning of the day, as well as to any short options initiated during the day that are set to expire that day. For example, for options expiring on the 7th of the month, an additional ELM of 2% will be required on that day, regardless of other weekly or monthly expiries. This measure will take effect on November 20, 2024.

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