OTC Preference & Regulatory Capture Risks in Draft PMR Amendments

The Central Electricity Regulatory Commission (CERC) issued the Draft Power Market (First Amendment) Regulations, 2025 on 17 June 2025. Soon after, SEBI’s interim order dated 15 October 2025 exposed insider trading linked to CERC’s controversial market coupling decision. The SEBI investigation revealed that confidential internal deliberations and even live proceedings of CERC meetings relating to market coupling were streamed to individuals associated with an Over the Counter (OTC) power trading platform, notably GNA Energy Pvt. Ltd. — one of the registered OTC operators and CERC Licensee. This chain of events and other factors raises a serious question: was the draft Power Market amendment, which appears to favour OTC platforms, shaped under the influence of the very network now under SEBI’s investigation?

1. A Fundamental Shift: OTCs Elevated to Market Status

The draft amendment expands the definition of “Market” to formally include OTC platforms as trading venues at par with power exchanges. It authorizes these platforms to facilitate transactions in delivery-based electricity, capacity, battery storage, renewable energy certificates, and virtual power purchase agreements (VPPAs), with prices determined through bilateral negotiation or private bidding rather than transparent, centralized discovery. In essence, the amendment transforms OTC platforms into quasi-exchanges — enabling them to perform exchange-like functions but without the same level of transparency, market surveillance, prudential checks, or clearing obligations that safeguard the integrity of regulated markets.

2. From Regulated Exchanges to Light-Touch OTCs

In all mature jurisdictions, OTC markets are permitted but operate under strict transparency, reporting, and surveillance rules. However, India’s Draft Power Market Amendment 2025 departs from this norm by extending trading privileges to OTC platforms without corresponding accountability or oversight, thereby risking the creation of an opaque parallel market outside the reach of real-time supervision.
Under the 2021 Power Market Regulations, OTC platforms were confined to passive roles — primarily for information sharing and acting as neutral repositories of market data, without engaging in trade, clearing, or settlement. The draft amendment, however, transforms them into active trading venues capable of facilitating electricity, capacity, renewable, banking and VPPA transactions. This fundamentally alters the market structure by erasing the firewall between tightly regulated power exchanges and private bilateral trade.

Global Comparison of OTC Power Contract

A global comparison of OTC power contract regulation reveals how far India’s draft Power Market Amendment 2025 diverges from international best practices. In the United States, all OTC power transactions must be reported to Swap Data Repositories (SDRs) under the supervision of the CFTC and FERC. The European Union, through REMIT, requires trade reporting to ACER, while the United Kingdom mandates submission to Registered Reporting Mechanisms (RRMs), ensuring complete visibility for Ofgem and the Financial Conduct Authority. In stark contrast, the Indian draft amendment introduces no obligation for mandatory trade reporting or real-time data sharing with system operators such as NLDC or CERC, creating a major transparency gap.

Transparency and surveillance requirements in the U.S., EU, and UK are designed to ensure market integrity through real-time publication of prices and volumes, continuous monitoring, and mandatory disclosure of inside information. These regimes operate with constant regulatory oversight to detect manipulation and insider trading—offenses that are criminally prosecutable. India’s draft, however, allows opaque bilateral OTC trades with no audit trail, no obligation for public disclosure, and no defined surveillance or compliance architecture, leaving such trades largely invisible to regulators.

Similarly, in terms of clearing and settlement, global frameworks require that standardized OTC contracts pass through central counterparties (CCPs) to mitigate credit and counterparty risk. India’s draft amendment, by contrast, contains no provision for clearing, margin requirements, or risk management safeguards, exposing participants to unmitigated financial exposure. On cybersecurity and IT oversight, the U.S., EU, and UK mandate annual third-party audits, disaster recovery testing, and encryption standards, while the Indian draft merely requires OTCs to maintain a “secure electronic platform” without defining protocols or audit frequency.

Regulator access to trading data is another defining difference. International regulators like ACER, Ofgem, and the CFTC enjoy real-time access to all OTC trade repositories, whereas India’s draft offers no mechanism for post-trade or real-time regulatory access. Finally, while non-compliance in Western markets attracts civil and criminal penalties, the Indian proposal lacks any penalty framework for OTC misconduct or data violations.

While exchanges continue to operate under stringent governance norms — including continuous market surveillance, demutualized ownership, and CERC-approved contracts and algorithms — OTC platforms are exempt from such obligations. They require no prior approval for contract design, no mandatory trade reporting, and no independent audit trails. This regulatory asymmetry invites opaque bilateral pricing, weakens market discipline, and risks eroding public confidence in price integrity.

The draft amendment exposes a major cybersecurity and governance blind spot by granting OTC platforms quasi-exchange functions without comparable safeguards. While power exchanges operate under stringent CERC-approved IT, audit, and data security protocols—including annual independent audits, disaster recovery systems, encryption standards, and mandatory incident reporting—OTCs are only required to maintain a vaguely defined “secure electronic platform.” This weak requirement allows them to conduct large-scale bilateral trades without oversight, creating a two-tier market: one regulated for security, the other operating in a digital grey zone vulnerable to manipulation, unauthorized access, and data breaches. By allowing OTC platforms to perform exchange-like functions without corresponding prudential standards or audit mechanisms, the draft risks creating unregulated shadow exchanges that could undermine market integrity. To prevent this, CERC must mandate prior approval for all OTC contracts and explicitly prohibit any form of clearing or settlement by these platforms. In essence, the draft framework seeks to elevate OTC trading to exchange status without embedding the fundamental safeguards of transparency, surveillance, cybersecurity, and accountability that define credible and well-regulated power markets globally. 

 3. Conflicts of Interest and Regulatory Capture

SEBI’s investigation into insider trading has exposed serious breaches of regulatory integrity within CERC. The interim order revealed that confidential information on market coupling was leaked from CERC’s Economics Division to individuals linked with an OTC platform operator, GNA Energy Pvt. Ltd. Sensitive committee minutes and regulatory draft orders were allegedly shared over private channels, and even live proceedings were streamed to external parties. The SEBI order identified how CERC insiders and representatives of GNA Energy exchanged non-public material through a WhatsApp group named “OTC,” which was used to circulate internal documents and deliberations. These findings point to an alarming nexus between regulatory insiders and market participants, indicating that the same network now under investigation could directly benefit from the proposed amendment that grants expanded autonomy and commercial latitude to OTC platforms.

4. Risks and Consequences

The proposed amendment raises multiple risks that strike at the core of market governance and transparency. First, market integrity is threatened as opaque bilateral pricing enables manipulation, circular or wash trades, and the creation of artificial reference prices. Without centralized clearing or real-time reporting, such trades can be structured to distort market signals, mislead participants, or even launder commercial losses.

Second, the negotiated price framework proposed in the amendment—lacking transparency, time-stamping, or traceable disclosure—creates a serious risk of corruption and money laundering. OTC platforms are not subject to defined KYC, AML, or suspicious transaction reporting obligations, unlike exchanges that operate under SEBI- or RBI-aligned compliance norms. As a result, financial flows arising from OTC energy trades can move outside the purview of formal financial oversight, fostering a parallel, opaque market with no verifiable audit trail. Allowing “mutually agreed” pricing between buyers and sellers, without any regulatory visibility or disclosure, opens the door to rent-seeking, favouritism, and off-book settlements—especially in government or DISCOM-linked transactions where discretion can be easily misused. In the absence of transparent, competitive price discovery, such bilateral arrangements become fertile ground for collusion, inflated valuations, and financial manipulation disguised as market flexibility.

Third, the risk of regulatory capture becomes evident when rulemaking appears to advance the interests of those subject to regulation. When the same entities under SEBI investigation stand to benefit from a regulatory framework that expands OTC privileges, public oversight is undermined, and institutional credibility erodes.

Fourth, transparency erosion is inevitable. Power exchange transactions are traceable, timestamped, and publicly disclosed; OTC transactions, by contrast, remain private and unreported. This opacity defeats the foundational goal of creating a single, transparent, and efficient power market.

Fifth, there is the danger of policy distortion. Treating prices discovered through unregulated OTC trades on par with competitively bid tariffs under Section 63 effectively privatizes price discovery. It undermines consumer protection, reduces accountability, and allows private contracts to dictate market benchmarks without public scrutiny.

Sixth, the proposed expansion of OTC-based Virtual Power Purchase Agreements (VPPAs) and renewable energy trades could weaken India’s carbon accountability framework. Without a verifiable audit trail or centralized record-keeping, claims of renewable consumption and decarbonization compliance could become unverifiable, undermining both market credibility and climate policy integrity.

Lastly, the proposed PMR Amendment’s silence on cross- holdings between power exchanges and OTC platforms poses a major regulatory risk. If exchanges are allowed to own or control OTC platforms, it effectively gives them access to two parallel regimes — one tightly regulated and one weakly supervised — enabling regulatory arbitrage and shadow market activity. Such ownership structures can distort price discovery, shift liquidity to opaque channels, and create insider advantages through information asymmetry. Unlike the EU, U.S., or UK, where such cross- holdings are prohibited or tightly firewalled, India’s draft leaves a critical gap that could undermine market integrity, transparency, and fair competition.

5. The Way Forward

The draft PMR amendment threatens to undo two decades of progress in building a transparent, exchange-led market. By legitimizing opaque, lightly supervised OTC contracts, it shifts India’s power sector from a rule-based, publicly regulated environment to a loosely governed network of private bilateral deals. Granting quasi-exchange status to OTC platforms without imposing equivalent oversight effectively empowers the same ecosystem that SEBI has already found vulnerable to information leakage and misuse. To restore credibility and protect market integrity, several corrective steps are essential:

First, the draft PMR amendment should be suspended until a full and independent investigation into potential regulatory influence and conflict of interest is concluded. Proceeding with rulemaking under suspicion risks lasting damage to institutional legitimacy.

Second, real-time reporting of all OTC transactions to system operators and regulators must be mandated to ensure traceability of volumes, prices, and counterparties. Transparency in trade data is the first line of defence against manipulation and market distortion.

Third, OTC platforms must be subject to the same governance, audit, and surveillance standards that apply to power exchanges. Equal functionality demands equal regulation — anything less creates systemic arbitrage.

Fourth, OTC platforms should be explicitly prohibited from replicating exchange contracts or from setting benchmark prices. Their function should remain complementary, not competitive, to regulated exchanges.

Fifth, prices emerging from OTC trades should not be treated as equivalent to tariffs discovered under Section 63 of the Electricity Act. Only competitive bidding under regulatory supervision can safeguard consumer interests and uphold cost transparency.

Only by following this roadmap—anchored in transparency, accountability, and equal regulation—can the credibility of India’s power market and its institutions be truly restored.