Pandey, who completes his first year as the head of India’s capital markets regulator, said the recent measures by Sebi were not aimed at the entire derivatives market but at pockets of speculation in the segment. The Sebi chief also spoke on settlement regulations and promoter norms, among other issues. Edited excerpts:
You’ve said your goal is to keep policies market-friendly as the ecosystem evolves. Are you satisfied with the progress so far?
Broadly, yes. Within Sebi, there is a growing emphasis on what I would call optimum regulation. We recognise that regulation has costs and can create unintended consequences. Where multiple options achieve the same objective, we should choose the simpler one with lower compliance costs. Over time, rules tend to accumulate, increasing compliance burdens for both regulated entities and the regulator. Our comprehensive regulatory review aims to rationalise and streamline this. Ultimately, investor protection and market development must go together.
Over the past two years, Sebi has taken several steps to curb excessive speculation in equity derivatives. Is there a measure or a level that you are targeting at which you would consider that the objective has been achieved? Are you following a number-driven or principle-driven approach?
We are not following a number-driven approach. Our approach is principle-driven. The focus has been on assessing the impact of the measures we’ve introduced. Often, finfluencers highlight only the winners, creating an exaggerated perception of returns. By placing collective data in the public domain, we aimed to present a realistic view of outcomes in the market. Transparency itself is a powerful form of investor education. We also introduced safeguards such as tighter margin norms, especially on expiry days, to curb lottery-like speculation. Now, we need to assess the impact of these steps through data, rather than reacting month to month. We must recognise that there are also genuine, informed participants in the derivatives market. The objective is not to shut down the market, but to ensure it operates responsibly. Future steps, if any, will be guided by careful data analysis and a balanced, mature approach.
Some market participants warn that India should avoid the path taken by countries such as China and South Korea, where curbs on derivatives speculation have led to a loss of liquidity that has been hard to restore. Has Sebi factored in the risk of liquidity leaving the market as a result of its recent measures?
It is too sweeping to treat the entire F&O segment as one block. Derivatives play a vital 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-tenor index options, particularly weekly and expiry-day contracts, where speculative activity had become concentrated. If there is a problem in one area, the response should address that area, not disrupt the entire system. There are multiple viewpoints on this – some argue weekly options should continue unchanged, others warn about liquidity risks, and some suggest calibrated measures such as eligibility criteria. The objective is to address concentrated risks while preserving the overall role and liquidity of the derivatives market. So there is, in my opinion, a need even for the media not to really call it F&O, and rather to coin it as ‘O’ on the expiry day and weekly.
So, just to be clear, your concern about derivatives is the pocket of speculation rather than the broader segment.
Yes. You can’t start badgering your body just because you have a boil on your nose. There are several views, like it should continue or let’s get out of weekly, or can we have something in between. There are people who are talking about what kind of criteria could be made for access, for example. Collectively, we should be comfortable that this is the right approach to take. Has Sebi discussed the topic of access (eligibility to trade) in F&O?
No, I’m not saying that. All I am saying is these are already different points of view. F&O has been one of the most hotly debated subjects. All I am saying is please don’t call it F&O, and if you have a problem, call it ‘O’ on the expiry date.
There are also some concerns over growing speculation through margin trading facility (MTF) exposures. Is Sebi looking into this?
We continuously monitor the situation, but MTF already operates within defined guardrails. There are net worth requirements and leverage limits. We have taken the view that re-pledging of client securities for additional leverage should not lead to over-leveraging. At this stage, we believe MTF should be allowed to function within these guardrails while keeping risks under watch. Liquidity in the cash market is important, and we are examining ways to deepen it. For instance, a working group is reviewing the short-selling and SLBM framework to understand barriers and encourage broader participation. Derivatives and cash markets must function together. Derivatives, particularly longer-tenor contracts, play an essential role in price discovery and hedging. The key is to ensure appropriate position limits and risk controls so that excessive speculation is contained and markets remain stable.
Sebi is reviewing its settlement regulations. While settlements have increased over time, litigation and case backlogs remain high. Are further simplifications being considered?
Yes. Greater clarity and proportionality are needed in settlement regulations. Clearer rules reduce ambiguity, limit multiple interpretations, and help bring down disputes and litigation. We do not want the system to become a ‘litigation paradise’. Simpler, clearer rules ultimately strengthen market confidence.
How is Sebi rethinking the concept of promoter, particularly, under 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 are also examining LODR (Listing Obligations and Disclosure Requirements). A working group is gathering feedback, and the proposals will go through multiple committees before consultation papers are issued.
There are concerns that some companies report profits just before an IPO and then slip back into losses, raising allegations of window-dressing. How does Sebi view this?
It is important not to generalise from a few instances. One egregious case does not indicate a systemic problem. The key is to distinguish between isolated misconduct and a broader pattern. Rushing to introduce additional rules in response to individual cases risks overregulation and could burden compliant companies without solving the underlying issue.
Sebi is reportedly issuing notices to lawyers and tax consultants for alleged confidentiality breaches during M&A deals. Do you foresee jurisdictional or enforcement challenges, given that they are also regulated by other professional bodies?
If the investigation finds evidence of a violation, the matter proceeds to a quasi-judicial process within Sebi. A show-cause notice is issued, and the concerned parties are given an opportunity to respond and be heard before any order is passed. The outcome may confirm, modify, or set aside the investigation’s findings. These orders are subject to appeal before the Securities Appellate Tribunal.