UPI-based trading, new UPSI compliance, and FPI reclassification rules boost foreign and domestic investor faith
The Securities and Exchange Board of India has issued new regulations in recent times to further strengthen transparency and security in Indian markets. The new SEBI rules will significantly affect the share-trading mechanisms, making guidelines for corporate disclosures more comprehensive.
SEBI and RBI have recently established new FPI rules as well on the count of investment caps and reclassification procedures. Together, these regulatory steps will boost both foreign and domestic investor confidence in India’s capital markets.
SEBI’s New Trading Rule: Share Transactions by Using UPI
For a long time, the funds had to be put in the trading account in advance before executing trades, which resulted in delays and tied-up capital.
Now, SEBI has made it mandatory to introduce a UPI-based block system or an integrated ‘three-in-one’ trading account system by February 1, 2025. This shall provide seamless access and efficiency to traders to buy and sell shares directly through UPI.
The new system is derived from the Application Supported by Blocked Amount (ASBA) facility. Qualified stock brokers (QSBs) need not transfer the amount in advance. They merely block the required amount in the bank account of a trader.
The newly proposed SEBI trading rule will give the client greater control over his funds. The client will now only be required to transfer the amount for a specific trade. Any unused balance will remain in the client’s bank accounts. Interest will accrue on this idle balance, thereby increasing the liquidity and potential benefits for the trader.
Scope of UPSI Regulations Broadened
Other than trading enhancements, SEBI has also sharpened its corporate transparency stand. It has expanded the list of events recognised to be classified as Unpublished Price-Sensitive Information (UPSI).
Under this new SEBI policy, the incidences of corporate changes like a change in key managerial persons, resignation of auditors, fraud, default, or forensic audits that detect financial malpractices are also included. Thus, the public will be able to get the company’s sensitive material information well in time.
The third clarification is on agreements that affect management control. It involves resolution plans, restructuring, and legal actions involving listed entities or their top management. These agreements shall now be considered UPSI.
The newly defined UPSI events are generally great influencers for the prices of stocks and affect the decisions of investors. Therefore, these Indian UPSI compliance rules are in line with SEBI’s commitment to investor protection.
RBI and SEBI Joint Guidelines for FPI Reclassification
RBI has joined hands with SEBI to bring forth clear guidelines related to FPIs, under which all reclassification procedures for investments above a set limit have been specified.
Under the FEMA, FPIs are allowed to invest up to 10% of paid-up equity capital in a company. However, if the holdings are more than this threshold limit, FPIs can now opt for divesting extra or reclassifying the holding as foreign direct investment (FDI). The FPI will need to do this within a five-day window after settlement of the trade.
This reclassification mechanism comes with strict compliance requirements. In the case of investments above the prescribed limit, prior approvals are compulsorily needed from the Indian government and the investee company.
Even if the amount drops below the 10% mark, the entire investment remains in the domain of FDI rules once reclassified as FDI. This new operating model opens up an avenue for FPIs to transition toward a more strategic role within Indian companies. FDIs can now be used to develop long-term relationships that could then sustain domestic growth.
Better Regulation and Reporting Standards
SEBI and RBI have also elaborately explained guidelines to the custodians and FPIs. This has safeguarded the virtue of efficient reporting of breach situations and reclassification action.
The custodians will unfreeze equity instruments only after the successful execution of reclassification reporting. In its circular, the SEBI calls out the date when the threshold breaches occur as the official date of reclassification.
The directive also reminds FPIs to strictly adhere to sectoral caps, entry routes, pricing, and additional compliance obligations mandated under FDI norms. Especially for investments from countries sharing land borders with India, additional approvals are mandatory. SEBI has also emphasised that FPIs reclassified as FDIs must strictly comply with Schedule I of the applicable FDI rules.
Industry Experts and the Road Ahead
Industry commentators welcomed these moves as a positive push to strengthen India’s financial system.
Rajesh Gandhi, Partner at Deloitte noted that the new SEBI rules provide clarity on recategorisation and consequent tax implications.
According to Sunil Kumar, Tax Partner at EY India, “These changes will likely draw more strategic investments into India’s markets, ensuring regulatory compliance and stability.”
Conclusion
So, through these sweeping changes, SEBI and RBI are heralding a new era for the financial landscape of India. They are more likely to balance innovation in trading with tight regulatory oversight. The UPI-based shift in trading, expansion of UPSI, and rules on FPI reclassification will propel a more transparent, accessible, and investor-friendly environment for traders in India.
New SEBI policy and rules boost domestic and foreign investors’ confidence by ensuring security for trading activities in the Indian market.
