In March 2020, amid the pandemic and an unsettling choppiness within the stock market, the Securities & Change Board of India (Sebi) had taken a slew of measures to minimise volatility. One of many steps was capping the bare or unhedged publicity that offshore and native mutual funds may tackle fairness index derivatives.
On not less than 10 cases, a number of the FPIs took massive brief or lengthy positions at numerous factors in 2021 and 2022, mentioned two individuals aware of the matter.
The brand new rule, which got here into impact from March 23, 2020, continues even at present although the extent of penalty has been lowered.
Until then, the publicity restrict was ₹500 crore or 15% of the open curiosity – the excellent or unsettled by-product contracts like futures or choices. This restrict was lowered to ₹500 crore. A fund overshooting the restrict was penalised with its margin chargeable on the surplus place getting locked in by the inventory alternate and clearing company for a interval of three months.
The rule was renewed each month in 2020 when volatility was abnormally excessive, and in November 2020 the lock-in interval for the margin was lowered to at least one month. The November 2020 press launch by Sebi additionally talked about that these measures had been to proceed till additional instructions are issued by Sebi.
Nevertheless, there was some confusion among the many funds as operational pointers, which had been up to date by the regulator submit 2020, continued to state the unique place limits (together with the reference to fifteen% open curiosity) side.
“Whereas the press launch was issued as a ‘measure’ to handle a particular market volatility rising out of the pandemic, the battle between the operational pointers (and now the Grasp Round) on the one hand, and the November 2020 Press Launch then again, has led to a state of affairs the place market individuals appear to more and more depend on confirmations from the surveillance division of the exchanges,” mentioned Richi Sancheti, founder companion of the legislation agency Richi Sancheti Associates. In accordance with him, until FPIs function with a dynamic ‘compliance handbook’ that takes under consideration the frequent updates from the regulator and the exchanges in addition to views emanating from the surveillance divisions, it’s evidently robust to keep away from breaches in publicity.
A Sebi spokesman didn’t reply to ET’s queries on the topic whereas alternate officers didn’t elaborate on the breaches by the funds. “With out the index by-product publicity cap, the market would have most likely witnessed higher bouts of volatility. With the pandemic beneath management and the market far much less risky than it was two years in the past, a number of the FPIs have informed their custodian banks the necessity for Sebi to revive the restrict to its earlier stage of 15% open curiosity. However the regulator will not be at present reviewing the restrict,” mentioned an official with a custodian financial institution.
As towards a web influx of ₹2.18 lakh crore from FPIs between April and December 2020, overseas funds web bought ₹29,800 crore and a document ₹1.17 lakh crore in 2021 and 2022, respectively.