Designing Markets through Regulation: Economic Perspectives on SEBI’s June 2025 Overhaul

– Ayushi Singh

Introduction

In June 2025, the Securities and Exchange Board of India (“SEBI”) introduced a wide-ranging set of regulatory reforms aimed at enhancing the efficiency, transparency, and flexibility of Indian capital markets. These changes spanned a broad spectrum of actors and instruments, including startup issuers, public sector undertakings (“PSUs”), infrastructure investment vehicles, among others. Although these developments have attracted attention in financial and legal circles, their full implications cannot be understood without considering the economic incentives they reshape. This blog selectively analyses five of these reforms where legal design clearly intersects with economic behaviour, ranging from the streamlining of IPO processes and the recalibration of PSU delisting, to clarifications in REIT and InvIT structures, the widening of access to the social stock exchange, and new uniform standards for debenture trustees. Other reforms, though important in their own right, have been left aside as they offer limited analytical depth for law-and-economics inquiry.

Rewiring the IPO Process

As part of the June 2025 reforms, SEBI introduced two major procedural reforms to the Initial Public Offering (“IPO”) framework: firstly, the reduction of the listing timeline from T+6 to T+3, and secondly, the requirement that all pre-IPO shareholding be fully dematerialized before the filing of the Draft Red Herring Prospectus (“DRHP”). These measures appear administrative on the surface. However, they carry important consequences for how companies signal credibility, how investors absorb information, and how trust is built in public offerings.

The first refrom, that shortens listing timeline significantly alters the rhythm of the IPO process. Investors now have only three trading days to interpret subscription patterns, media narratives, and comparative valuations before the stock begins trading. In theory, this compresses transaction costs and speeds up capital mobilization. However, when viewed through an economic lens, the timing itself becomes a signal. A limited cooling-off window may cause demand to concentrate earlier and more emotionally, especially among retail investors who rely on public cues. This dynamic can lead to heightened volatility on listing day. When investors have less time to adjust their expectations, early buzz and herd behaviour tend to dominate.

Pre-listing investor sentiment, especially as captured through social media activity, strongly correlates with initial price jumps and long-term underperformance. A shorter timeline amplifies these sentiment effects. While SEBI’s intention is to improve efficiency, the outcome may include increased mispricing, with a wider gap between intrinsic value and market enthusiasm.

The second reform, which mandates full dematerialization of all pre-IPO shareholding, directly addresses a different type of inefficiency: information asymmetry. In earlier regimes, some insider holdings could remain in physical or irregular form. These included instruments such as employee stock options or early angel investor shares, which were often invisible to most retail investors at the time of filing. This incomplete picture made it difficult to assess who actually held how much, or under what terms. The consequence was a form of information rent, where insiders could choose when to disclose material facts in ways that disadvantaged external investors.

George Akerlof’s theory of adverse selection helps clarify the importance of this reform. When prospective investors fear that they are the least informed participants in the market, they discount all offers, even high-quality ones. This lowers overall participation and undermines fair price discovery. By enforcing dematerialization at the pre-filing stage, SEBI helps close this informational gap. All shareholding becomes traceable, standardised, and transparent. Investors can see, in real time, the composition of the company’s cap table. From an institutional economics standpoint, the reform also reduces coordination frictions. With every security electronically documented and settled, information flows become faster, and compliance becomes more easily verifiable. This lowers legal risk for issuers and enhances governance for the market as a whole.

These changes may yield greater efficiency in the short run, especially for large issuers and fast-moving markets. However, they also transfer more responsibility to investors for quickly interpreting pre-listing cues and assessing governance disclosures. Over time, this may change how IPOs are priced, marketed, and timed, particularly for startups with limited institutional backing. SEBI may need to supplement these reforms with enhanced investor education or stronger disclosure templates to maintain market stability.

Delisting of PSUs and Price Discovery

Whereas IPO reforms influence the market’s entry point, SEBI’s changes to PSU delisting reshape its exit dynamics by enabling fast-track delisting of PSUs in which the government holds 90% or more of the equity. Alongside this, SEBI has replaced the existing reverse book-building process where investors placed bids to indicate the price at which they were willing to sell their shares for a delisting, much like an auction in reverse. In its place, a formula-based pricing mechanism has been brought that calculates the exit price using a weighted average of recent market prices. The new approach offers more predictability, but it also raises concerns that prices may no longer capture investor sentiment, a problem that is especially pronounced in thinly traded PSU stocks. 

One concern arises from how this ease of exit might weaken governance incentives within PSUs. If managers know that the firm can be quickly and cleanly delisted without broad shareholder negotiation, they may reduce investment in disclosure, board transparency, or minority protections in the years preceding exit. This idea finds support in Martinez and Serve’s study on delisting in Europe, which shows that companies with weaker governance are more likely to delist, particularly when the costs of staying public outweigh the pressure to maintain oversight. 

The second element of the reform, the move to formula-based pricing, carries additional behavioural implications. The current formula links delisting prices to weighted averages of past trading data. While this approach creates procedural predictability, it may also introduce a subtle bias in how investors interpret price. Psychological research has shown that individuals often rely heavily on initial reference points, even when those anchors are arbitrary or outdated. This anchoring effect is well known in behavioural finance. In delisting scenarios, it can lead shareholders to accept prices that reflect past market noise more than present firm value. The result may be systematic under-pricing during PSU exits. If the government can acquire shares below fundamental value simply because the reference average drags expectations downward, then retail and institutional investors effectively subsidize the delisting. 

On the other hand, it can be argued that the previous pricing formula, which was based on calculation of a 60-day volume-weighted average price (“VWAP”), also created distortions, especially for thinly traded PSUs with limited public float. In such companies, market prices often reflect the implicit trust in government backing rather than the firm’s actual net worth or profitability. When these inflated valuations are used to calculate a 60-day VWAP for delisting, the result can be an unrealistically high exit price.

The reform can also be examined through Coase’s Property Rights Theory. Coase argued that when property rights are clearly defined and transaction costs are low, resources will naturally flow to their most efficient use. Simplifying pricing mechanisms and enabling fast-track processes can reduce the transaction costs associated with delisting. By shifting from reverse book-building to an objective formula, SEBI has assigned a clear right of price initiation to the regulator rather than dispersed shareholders.

While SEBI has reduced procedural complexity, it may also have weakened the twin forces of market discipline and price discovery. Investors in thinly traded PSUs may grow more cautious, knowing that price anchoring could undervalue their holdings. Over time, this could affect trading volume and investor confidence in government-owned stocks. Delisting may now be faster and more formulaic, but also less responsive to the reputational and behavioural dynamics that shape long-term trust in public markets.

Streamlining REIT and InvIT Regulations

Before SEBI’s June 2025 reforms, the definition of “public unit holding” under Real Estate Investment Trusts (“REITs”) and Infrastructure Investment Trusts (“InvITs”) regulations lacked precision. The reform addressed this ambiguity in two parts: First, the clarification on public unit holding ensures that units held by related parties, sponsors, investment managers, and project managers do not count as “public,” unless the related parties are Qualified Institutional Buyers (“QIBs”). Additionally, the sponsor group, sponsor, investment manager, and project manager themselves are now entirely excluded from the definition of public unit holding, regardless of their QIB status.  This change aligns with signalling theory, which argues that entities send quality signals through costly and verifiable actions. By tightening the definition of “public,” SEBI improves transparency around market float, ensuring that high-quality trusts can signal credible public participation while minimizing the risk of misinterpretation.

Second, Holding Companies with negative net distributable cash flows are now permitted to adjust those losses against Special Purpose Vehicle (“SPV”) inflows before distributions are made to REITs or InvITs. Previously, mandatory distribution rules required 100% of SPV cash flows to be passed through, regardless of the holding entity’s own cash position. This reform corrects a misalignment between financial structure and cash realities, reducing frictions that could lead to inefficient distributions or forced external borrowing. Internalizing economic activity avoids costly market transactions, especially when internal reallocation is cheaper and more adaptable than external financing.

Finally, SEBI reduced the minimum allotment size for privately placed InvITs to ₹25 lakh for all asset mixes. This significantly lowers the barrier to entry for institutional investors and facilitates broader capital mobilization. However, it may also invite relatively unsophisticated investors into structurally complex and less liquid instruments. Long-term effects will depend on how well information clarity offsets the risks of financial sophistication gaps.

Expanding Access through the Social Stock Exchange

Through the June 2025 reforms, the scope of the Social Stock Exchange (“SSE”) has been broadened by welcoming public charitable trusts, societies registered under the Societies Registration Act, and Section 8 companies into its fold. It also introduced approved Social Impact Assessment Organizations (“SIAOs”) to verify impact metrics in a consistent and comparable way. 

By admitting a wider array of issuers, SEBI may have unintentionally created a path-dependent signalling hierarchy. Early entrants to the SSE, who are typically better resourced or more established, benefit from increased visibility and established relationships with assessors. Newer or smaller organizations may face greater difficulty in establishing equivalent credibility. Over time, this can result in a two-tier SSE in which reputational advantages become entrenched. SEBI could consider transitional measures such as listing subsidies or preferential access to SIAOs to prevent long-term disparities in perceived impact quality.

At the same time, mandatory SIAO certification helps address information asymmetries by making social impact reporting more transparent and verifiable. Investors are better able to compare social performance across different types of issuers. However, because the SSE operates in a hybrid space that combines financial and philanthropic goals, reputational risk behaves differently than in standard equity markets. If one issuer misrepresents its impact, investors may become sceptical of all listed entities, raising the perceived risk of the entire platform. While uniform assessment rules encourage mutual monitoring, too much standardization could weaken the precision needed for trust-based investing.

SEBI’s ongoing challenge will be to ensure broad-based access while preserving the credibility of social signals. Differentiated disclosure formats, phased onboarding, or scaled verification could help manage this balance effectively. Over time, the success of this reform will depend not just on who is eligible, but on how social outcomes are verified and communicated to diverse investor classes.

Standardizing Trust: Debenture Deeds and Enforcement

While the SSE aims to broaden access and social credibility, SEBI’s changes to the debenture trustee regime turn inward to focus on monitoring and post-issuance discipline. These changes included mandating a standardized Debenture Trust Deed (“DTD”) for all listed debenture issuances, clarifying obligations related to enforcement and default procedures, and operationalizing a clearly defined Recovery Expense Fund. SEBI also shifted key trustee responsibilities under the LODR Regulations to ensure stronger compliance monitoring and regulatory enforcement.

At the heart of this reform lies a classic principal–agent problem. In debt markets, debenture trustees act as agents for a dispersed group of bondholders who cannot individually monitor a company’s conduct or enforce repayment terms. Without clear incentives and boundaries, trustees may under-enforce covenants or delay action in the event of default. Standardizing the trust deed reduces this agency slack by codifying what events trigger enforcement and how trustees must respond. It removes ambiguity from the contract, narrows discretion, and lowers the cost of monitoring. This realignment improves trustees’ accountability to the bondholders they represent.

Beyond individual incentives, the standardized DTD also functions as a coordination device. Dispersed bondholders typically face significant obstacles in pursuing collective legal action. By giving every investor exposure to the same enforcement structure, the new DTD reduces contract heterogeneity and accelerates trustee-led recovery actions in default scenarios. Trustees can consolidate claims without reconciling conflicting terms, thereby lowering procedural frictions and making collective enforcement more feasible.

However, the new Recovery Expense Fund introduces a more subtle risk. With enforcement costs pre-funded, trustees may become less diligent in ongoing covenant monitoring. Knowing that post-default action is financially supported, they may reduce costly ex ante oversight. This creates a form of moral hazard, weakening preventive vigilance. Introducing clawback provisions for unused recovery funds or performance audits could help preserve strong monitoring incentives throughout the debt lifecycle.

Conclusion

Taken together, these reforms illustrate a regulatory philosophy that extends beyond rule changes. SEBI’s June 2025 overhaul shows a strong push toward simplification, broader participation, and reduced transaction frictions. Yet across the reforms, there emerges a normative tension between inclusion and informational depth. Measures like lowering allotment sizes for InvITs or expanding eligibility for the Social Stock Exchange democratize access. However, they may also dilute signalling precision or invite unsophisticated participation into complex markets.

Some reforms, such as standardizing trust deeds or mandating SIAO certification, do more than streamline processes. They shape the architecture of how information is produced and trusted. SEBI’s role in designing these systems suggests a shift away from reactive enforcement and toward proactive institution building.

Regulatory design must consider not only cost and access, but also how rules reshape trust, information flow, and reputational dynamics. Future reform should incorporate this behavioural feedback into its logic rather than respond only after the fact.