When the Rules Change Overnight: Q2 FY2026–27

October 2026

Dear Investor,

Indian markets ended the September quarter lower. The Nifty 50 closed at 22,620 on 30 September, 5.2% below its 30 June close, and the Sensex ended at 72,480. The broader market held up a little better: the BSE 500 TRI fell 3.6% over the quarter, against 4.9% for the Nifty 50 TRI. Most of the damage came in September, when the Nifty lost about 6%. The US Federal Reserve raised rates for the first time since 2023, Brent crude was around $105 a barrel on 29 September, the rupee weakened past 96 to the dollar and foreign investors are continuing selling Indian equities.

The month of September also showed us how quickly a rule change can reprice a whole sector, which is what we focus on here.

When the Rules Change Overnight: Why We Diversify

On 23 September, the Indian insurance regulator IRDAI released a consultation paper that wants to cap what distributors earn and to lower how much insurers can spend overall on running their business. The insurers' expense limits would come down in steps over two to five years. The next morning, insurance stocks fell sharply. PB Fintech, the parent of Policybazaar, closed 36% lower. Among life insurers, Max Financial closed about 10% lower and HDFC Life about 6% lower. The hardest hit were businesses built around selling insurance rather than underwriting it.

Nothing inside these businesses changed overnight. What changed was the market's view of what they would earn in the years ahead. The writer Nassim Taleb calls such events black swans: rare, hugely consequential, and easy to explain only after they have happened. Indian investors know one kind particularly well: the regulatory surprise.

It is worth saying clearly that IRDAI has a point. IRDAI's own paper makes the case with data. Between FY23 and FY25, the pay of distributors selling life insurance through corporate agents rose about 125% while premium from that channel grew 28%. In general insurance, payouts rose about 173% against premium growth of 37%. In both, payouts grew more than four times as fast as the premium they brought in. When that much of the money goes to the seller, the incentive is to make the sale, not to make sure the policy suits the buyer or that they keep paying for it. The paper is still a draft and may change after consultation. But the direction is sound from a policyholder's point of view.

This is not the first time a regulator has cut what the sellers of financial products earn. In 2009, SEBI removed entry loads on mutual funds, the fee investors paid upfront, often without knowing it went to the distributor. Overnight, distributors had little reason to push funds, and many weaker ones left the business. It took years, and the rise of SIPs and direct plans, before flows came back. A year later, it was the turn of ULIPs. Charges were capped, commissions dropped, and ULIP sales fell sharply. Agents didn't stop selling. They just moved to traditional plans, where commissions were still high.

Investors are better off today for both changes. But it wasn't quick. This time too, lower costs should help people who already buy insurance, as long as insurers pass the savings on. Whether it brings new people in, time will tell. In India, insurance has mostly been sold, not bought. (We wrote about this on LinkedIn here .)

That is exactly what makes regulatory risk so difficult. The regulator is often right, and it can still call an entire business model into question overnight. In the stock market, we have seen this several times in recent years.

Delta Corp, July 2023: When the tax bill is bigger than the company. The GST Council decided to levy 28% GST on online gaming and casinos, calculated on the full value of each bet rather than on the operator's fee. Delta, which runs casinos in Goa and had an online gaming arm, fell 23% the next day. In September came tax notices for past years of about ₹16,800 crore. The company's entire market value at the time was just under ₹5,000 crore, so the demand was more than three times what the whole company was worth. More notices followed a few weeks after that. The company disputed the demands in court, but a claim of that size, if it stood, would have put the company's survival itself in question. Then, in August 2025, came an outright ban on real-money online games. By the time of the ban, the stock was down more than 60% from its level before the GST decision.

Paytm, January 2024: Separate on paper, one in practice. RBI barred Paytm Payments Bank from accepting fresh deposits and most credit transactions from the end of February. Paytm's listed parent, One 97 Communications, lost over 40% of its value in three sessions. In hindsight, there had been a warning: two years earlier, in March 2022, RBI had already stopped the bank from taking on new customers. On paper, the listed company owned just under half of the bank. But the bank was the backbone of Paytm's wallets and merchant payments, so the market treated the two as one business, and the listed company took the full hit.

IIFL Finance, March 2024: Not bad loans, bad process. RBI stopped IIFL from giving new gold loans after its inspection found serious lapses, including in how the gold was tested and weighed and how much cash was paid out. Note that this was not about bad loans. Gold loans are backed by gold, so the lender has something of value to fall back on if a borrower doesn't repay. The problem was how the business was being run. The stock fell 20% on each of the next two days. We held IIFL at the time and took the fall with it. As we shared in Q4 FY24, we then exited, because regulatory issues like these take time to resolve and the stock usually suffers in the meantime. We also saw more opportunities elsewhere. RBI lifted the ban about six months later. By then, IIFL's gold loan book had fallen by nearly half. A business built over years had lost nearly half its gold loan book in about six months, because customers who couldn't get loans from IIFL went elsewhere.

Indian Energy Exchange (IEX), July 2025: When the rules rewrite the moat. IEX runs India's largest power exchange and handles the large majority of the country's short-term electricity trading. In any exchange, liquidity attracts liquidity: buyers and sellers go where the most trading already happens, because that's where they get the best price and can be sure their trade goes through. In July 2025, the power regulator CERC directed that bids from all power exchanges be pooled and matched centrally to arrive at a single price, a system called market coupling. The next day, IEX closed almost 30% lower. CERC's aim, one national price and a fairer deal for buyers and sellers, is hard to fault. But once all orders go into a common pool, being the biggest exchange no longer gives IEX its edge.

Nazara Technologies, August 2025: Shoot first, ask questions later. When Parliament passed the real-money gaming ban, Nazara fell over 21% in two days. The company said it had no direct exposure to real-money gaming. But it had put about ₹1,000 crore into Moonshine Technology, which runs the poker platform PokerBaazi. The ban shut that business down, and Nazara later wrote the investment down by about ₹915 crore. The market, though, had already taken about ₹2,800 crore off Nazara's value in those two days, roughly three times the eventual write-down. It punished the whole company, not just the part that was actually hit.

What these episodes teach us

The first question after a shock: can the problem be fixed? Paytm and IIFL had compliance and process failures. These were serious, but fixable. Paytm rebuilt its payments business through other banks, and IIFL was allowed back into gold lending after six months. Paytm's stock has since risen more than five times from its low, though it is still below its IPO price. Delta and IEX faced a different kind of problem: the rules changed what they could earn, or the edge they earned it with. No amount of compliance brings that back. For investors, telling these two apart is often the difference between buying after the panic and walking away.

An edge that comes from the rules can be taken away by the rules, a classic double-edged sword. IEX did not lose customers or make a mistake; the regulator chose to redesign the market it led. Insurance distributors are in a similar position today, since what they earn depends on limits the regulator sets. When a company's advantage rests on how its market is regulated, that is a risk no balance sheet will show.

The effects spread in both directions. Some rules move business from one company to another. The day IIFL was stopped, its rival Manappuram Finance had its biggest one-day gain since September 2020, and smaller power exchanges stand to pick up some of the trading IEX loses. We saw this in 2009 and 2010 too, when distributors moved to whichever product still paid well. Other rules shrink the whole market. The gaming ban didn't hand real-money gaming to anyone else in India; it shut it down. And the damage travelled: real-money gaming companies had been a big source of cricket advertising, by one broker's estimate around a quarter of IPL ad revenue, and much of that spending was frozen or moved elsewhere. For an investor, the question is not only who loses, but whether someone else gains, or whether the money simply disappears.

Indirect exposure is the hardest to see. Paytm and Nazara both had it. In each case, the problem sat in a company in which the listed business owned just under half, but not control. Looking at the revenue break-up alone, you might have missed it. The same risk can hide elsewhere too, for example in a company that depends heavily on one big customer or one partner. You only spot it if you look past the headline numbers and understand how the business really makes its money.

Why this shapes how we build portfolios

We cannot predict what a regulator will do next, and it would be dishonest to claim otherwise. What we can control is how much damage any single surprise can do. That is why we spread your portfolio across many businesses and sectors, and why we try to understand each business well enough to spot the risks that are not obvious. We were on the receiving end of this ourselves with instances such as Paytm and IIFL. Diversification is what limits the impact to a bad day for one stock rather than a bad year for the whole portfolio.

Agile Strategy: Key changes to the portfolio in this quarter

We bought into six new businesses this quarter:

Aroma chemicals: One of India’s largest aroma chemical manufacturers. Several capacity additions are due to come on stream over the next few months, which should help the business.
Omnichannel jewellery retail: One of India’s leading omnichannel retailers of contemporary fine jewellery, with certified diamond, gold, platinum and gemstone pieces. We expect profitability to build gradually, in a J-curve, as the business scales and operating leverage improves.
Consumer durables and electronics retail: One of India’s largest consumer durables and electronics retailers. It trades at a significant discount to its listed peer, which leaves room for a re-rating.
Quick-service restaurants: An Indian QSR player. We think the operating environment is turning more favourable, and that demand recovery can last at least the next few quarters.
Pharma distribution: A leading pharmaceutical distributor in India. It is moving up the value chain into higher-value medical technology devices, which should improve its business mix and profitability.
Media and entertainment software: A global software-as-a-service company offering a full-stack, cloud-native, AI-enabled platform to the media and entertainment industry. We expect profitability to improve meaningfully as the business scales and operating leverage strengthens.

We sold out of six businesses this quarter:

India’s leading commodity derivatives exchange, which earns transaction fees from commodity trading.
A diversified financial services group spanning lending, asset management and asset reconstruction.
A value-added steel and engineering products manufacturer serving infrastructure, industrial and defence customers.
A private-sector bank focused on retail, SME and secured lending.
A hospital-led healthcare services provider operating across India.
A South India-focused jewellery retailer, with a core focus on gold jewellery.

Note: Positions in our Quant scheme are generated via multi-factor models, are generally subject to very quick rotation and hence are not discussed here.

Market Outlook and Way Ahead

Most of the pressure on markets this quarter came from outside India: US rates, oil, the rupee and foreign selling. Some of it has now moved closer to home. In early October the RBI raised the repo rate by 25 basis points to 5.50% from 5.25%, its first increase since February 2023, and said its stance is now one of calibrated tightening. Consumer inflation was 4.82% in August, above the RBI's 4% target for a third month running. Most Fed officials expect another hike before the year ends.

Higher rates reach lenders first. A lender that borrows from the bond market feels a rate rise faster than a bank funded by deposits. That is one reason NBFCs fell nearly 10% in September while banks fell about 6%. With lending being our largest allocation, funding costs and loan quality are what we are watching closely.

Second-quarter results are about to gain full steam now. After a quarter like this, we want to see whether companies can pass on higher costs and whether demand is holding up.

The IPO market is another thing worth a mention. September had 30 mainboard IPOs, the most in a month since December 1996, raising about ₹38,800 crore, and the NSE's own issue was more than half of that. Around ₹66,600 crore of the roughly ₹1.12 lakh crore raised this year has come through offers for sale, which means the money went to existing shareholders and not into the companies. That is fine, and founders and funds should be able to cash out. But sellers choose their timing, and lock-ins for early investors end over the coming months, so that supply will reach the market too.

We cannot tell you where the Nifty will be by March, and we will not pretend to. What we have been saying earlier also still holds: for investors with a long horizon, corrections have been where later returns were built. We will stay spread across sectors, so that no single rule change or result decides the year, and cut what stops working.

Best,
Team East Green

* Companies named here are mentioned as market examples, for information only. They are not recommendations to buy or sell any security.

Disclaimer: This document is for information only and does not constitute investment or professional advice, an offer, invitation or solicitation. Information in this document has neither been approved nor disapproved by SEBI nor has SEBI certified the accuracy or adequacy of the contents. Investments in securities are subject to market risks and there can be no assurance or guarantee that the investment objectives will be achieved. Past performance is not indicative of future performance. Portfolio Manager investment decisions may not always be profitable and actual market movements may vary from anticipated trends. The value of client portfolios may be affected by securities market volatility, interest rates, currency rates, government policies, taxation, political and economic developments, exchange closures and force majeure events. Individual client performance may vary because of differences in starting date, capital additions or withdrawals and client-specific restrictions. Please refer to the Disclosure Document for further details.