Author: Mavadhiya Jay Rajendra, Shree Arjun Law College Affiliated to Bhakt Kavi Narsinh Mehta University
Abstract
The Securities and Exchange Board of India (SEBI), the watchdog of Indian capital markets, plays a crucial role in protecting and safeguarding the interests of investors. In 1992, SEBI became a statutory body, gaining the authority to regulate the capital markets and rectify loopholes by introducing necessary regulations to strengthen India’s financial ecosystem. Over the years, SEBI’s regulations and mandates have expanded significantly in response to the increasing complexity of capital markets and the growing participation of large institutional investors as well as retail investors. This article explores SEBI’s evolving regulatory approach over time, focusing on its efforts to balance the interests of vulnerable retail investors and dominant institutional players. Through a detailed analysis of significant reforms, regulations, circulars, and key policy changes, this study evaluates SEBI’s role in ensuring investor protection, market fairness, transparency, and confidence. As the recent unethical activities of Jane street spreads new fear in the capital market, reflecting the loopholes in the system in the digital era of the capital market. Resulting in shaking confidence of retail investors as SEBI’s growing influence regarding over-regulation and its potential to limit market freedom and watching how the big players were none affected. The paper concludes by identifying key challenges and offering recommendations for creating a more inclusive, efficient, and equitable capital market in India.
Keywords
SEBI, Indian Capital Market, Market Regulations, Institutional Investors, Retail investors, Reforms
Introduction
Capital Markets in India were rampant by the frauds during the 1980s by various scams and listing of companies that don’t even exist and investors feel unprotected by these types of activities in India's Capital Markets. Then the government established Securities and Exchange Board of India (SEBI) as a non-statutory body on 12th April, 1988. The board only kept eye on unethical activities in the market. Later the infamous Harshad Mehta scam exposed the loopholes in Banking systems resulting in the scam of 4,000 crore rupees, which triggered the government to give statutory powers to the Securities and Exchange Board of India (SEBI). By the responsive steps, SEBI gets power not only monitoring the suspicious activities, but also making regulations to protect the hard earned money of the investors. As the accessible internet and technological advancement occurs in the capital market, the numbers of new participants started to invest in the stock market. As we witness the digital transformation of India and the technological advancement in the brokerage house and in governance digitalization initiatives, opening the demat account is accessible to almost all people of India. Resulting in a significant rise in the opening of demat accounts in post-covid pandemic era, estimated surge around 40 million demat holders in 2020 to over 150 million demat accounts by mid-2024 according to SEBI's annual report 2023-2024. This surge of participation in Capital Market by the retail investor raises concerns for SEBI and becomes fresh challenges relating to the Stock market education, grievance redress and to protect from unusual trading. Simultaneously, large fund Domestic Institutional Investor (DII) firms and Foreign Institutional Investors (FII) firms could exert substantial influence in price, volume, liquidity and market depths.
The recent case of manipulation by Jane Street triggers new fear among the retail investors as they notice how the big institutional players manipulate market structure and play with liquidity to earn massive profit from the financial market. In defence, Jane Street says they protect their assets through arbitration and it is not illegal. While for big institutions, inconsistent regulations and laws like, Introducing or discontinuing weekly expiry of all major indexes, changes in fixed days of expiry, limiting and ceiling the value of contracts, etc are major concerns.
This raises a fundamental question: How can SEBI effectively balance its regulatory framework to ensure that both retail investors and Institutional firms’ interest are equally protected and promoted for the growth of Indian financial market and overall economy? The large numbers of retail investors seek transparency and protection against any sorts of manipulation, while big Institutional firms like FII and DII expect regulatory predictability, operational efficiency and minimal interventions. SEBI's challenges to protect the vulnerable retailers and to promote the big domestic and foreign institutions to keep investing in the Indian Financial market.
This article reflects how SEBI evolved and regulates the financial market over the years to protect the interests of both Retailers and Institutional players.
Literature Review
The role of Securities and Exchanges board of India (SEBI) in regulating the Indian financial market is deeply studied by various scholars, financial analysts and policy makers to analyse the SEBI’s approach to protect the financial market and safeguard the interests of the investors.
Journey of SEBI as a Regulator of India’s Capital Market:
The Scholars Ipsita Das, Kyvalya Garikapati and Pratiti Nayak briefs how the Indian Capital market is constantly evolving and shaping the Indian economy throughout its journey. This study reflects the early Indian market which was unregulated and unprotected. By taking positive steps by the government making the various committees, action plans and watchdog bodies to protect the financial market. Many initiatives were taken by the government, but the most highlighted one was the introduction of Securities and Exchanges Board of India (SEBI) Act 1992 as a non-statutory body. But later because of a series of scams came forward, the SEBI gets statutory, judicial as well as administrative powers.
Protection of Retail investors by SEBI
Researchers study various initiatives and steps taken by SEBI to protect the retail investors. DKJ BABU and DS Naidu (2012) briefly explained how the SEBI took steps to curb manipulation and protect the small retail investors. The initiatives like Reforming the stock exchanges, addressing grievances, action against directors of vanishing companies, awareness campaigns, reduction in D-MAT charges, protecting from false promises by mutual fund houses and compensation from investor protection funds. But the recent case of Jane Street again triggered the small investors that market is still in the hands of big players.
Interests of Institutional Investors
The big Institutional players have a significant role to drive the Indian stock exchanges, the two key players: Domestic Institutional Investors and Foreign Institutional Investors invest in the Capital Market through banks, mutual fund houses, venture capitals, etc. They could control liquidity and market depths giving a significant edge over retail investors. But it is not easy to stay invested as fluctuations of Indian rupees, simultaneous changes in government policies and strict regulations by SEBI occur. There are various factors affecting Institutional investors especially Foreign Institutional players which were well explained by Mrunal Joshi, Dr. Jayesh Desai and Nisarg Choksi studied patterns of Foreign Institutional players. Though SEBI takes initiatives like easing Foreign Portfolio investors (FPI) Norms, Streamlining Mutual Funds regulations and facilitating Algorithm trading.
Challenges and Criticism faced by SEBI
The SEBI faces many challenges and criticism from the retail investors as they get hunted by the Market manipulations by big players. Though SEBI takes strict action against them, they do not measure its impact on the efficiency of the market. G Sabrinathan (2010) have raised serious concerns over the regulatory body as SEBI holds a poor record carrying their award through appellate and the judicial systems. G Sabrinathan also criticized SEBI’s poor record in enforcing canons of corporate governance. Recently Silent criticism faced by investors in the case of unethical practices by Jane Street doing Manipulative Intraday Index strategy and Marking the Close strategy by different companies under Jane street to earn massive profit from Futures and options segment. Though SEBI issues an Ex-parte interim order and curbs fines, Jane Street resumes the trading in Indian Capital market after depositing around 4,844 crore rupees into escrow account. This type of practice poses significant threats to retail investors.
Methodology
This article adopts a doctrinal legal research approach, relying on primary and secondary resources to understand evolution of India’s regulatory body and impacts of its regulations. The methods we used:
By Statutory Analysis
Analysing the Securities and Exchanges board of India (SEBI) Act 1992 and related provisions and other relevant legislations.
By Reviewing of SEBI reports
By reviewing SEBI annual reports, updated regulations and circulars.
By Academic and Empirical Research:
By studying and analysing the peer viewed journal articles.
Results
The study highlights that SEBI has taken steps in the right direction over the years and took great initiatives and regulations to stop malpractices in Capital Markets.
Protecting Retail investors
SEBI takes comprehensive steps to limit the significant volume of options which were increased during post-covid. To curb this, lot size of Contracts raised and limiting the weekly expires to single index. Also various campaigns and seminars organized by SEBI to educate people about the capital markets. SEBI also suggests to ban so-called Fin-fluencers from YouTube and other digital media and stop them from giving any sorts of unresearched tips to innocent people promising massive profits.
Institutional Oversight
SEBI also acknowledges the growing influence of Foreign Institutional players and Domestic Institutional Investors who run various funds and firms. SEBI streamlines the compliance requirements for mutual funds, foreign portfolio investors (FPI) norms and upgraded market infrastructure for the Institutions.
Existing Challenges
The SEBI has taken all the necessary steps to protect the Indian Capital market, but despite this, the body faces heat against the Enforcement and judicial delays which raises serious concerns for the capital market. The absence of Strict disciplinary action against the culprits and manipulators hurts the confidence of the common people of the country. Also to maintain stable inflow of the foreign funds, it is important to give infrastructure support and ease of doing business regulations and compliance to stay invested in India. As the technological advancement and infrastructure of high frequency trade is building around, it will give advantage to big players and raise new upfront challenges for common retail traders. SEBI already fell behind to regulate strict disciplinary action against Manipulative firms and new upcoming threats of Artificial Intelligence and data protection will test the real character of the SEBI.
Conclusion
Since the establishment of SEBI as statutory body, there has been vast improvements in the Institutional framework in which securities are traded in India. SEBI also implemented mandatory disclosures, readdressing grievances and educating people by organizing various seminars and online & offline campaigns. But somehow the weightage of interests seems to be inside of big institutional players as most of the restrictions were made to retail traders to limit the participation in Futures and options segment of the Indices, which felt limiting market freedom to the common people. While the big institutions malpractice and manipulate whole indices in expiry and making big positions in futures and options to maximize their profit from the common retailers. Indeed, the regulations needed to limit the loss of the retailers, but also fact is this loss mainly occurs due to massive unnatural artificial moves by big players. Also, the poor record of SEBI in strict disciplinary and judicial action will grow the lack of confidence in retail participants.
Suggestions
By this study, we recommend introducing a separate judicial body and committee for a strict disciplinary action task force to protect the interests of Retail Investors. Second recommendation would be to form the committee to make a recommendation for the ease of transaction and business for the large institutions under single roof and third recommendation is to establish an independent Oversight body to review SEBI's action and regulations in policy making.
References
G. Sabarinathan, SEBI’s Regulation of the Indian Securities Market: A Critical Review of the Major Developments, 25 , 35 Vikalpa 13 (2010), https://www.iimb.ac.in.
KVSN Jawahar Babu & S. Damodahr Naidu, Investor Protection Measures by SEBI, 1 Arth Prabandh: J. Econ. & Mgmt. (APJEM) (Nov. 2012), https://www.pinnaclejournals.com.
Mrunal Chetanbhai Joshi, Jayesh N. Desai & Nisharg Choksi, Factors Affecting Investment Behaviour of Foreign Institutional Investors: Perception of Indian Investors (B.R.C.M. Coll. Of the Bus. Admin., Surat, Working Paper No. 2816495, 2016), https://ssrn.com/abstract=2816495.
Securities & Exchange Board of India, Agenda Notes – Item No. 18, Memo No. 60 of 2024: Proposal on Association of Persons Regulated by SEBI with Unregistered Advisors, at 1–8 (2024) (unpublished memorandum) (on file with SEBI), https://www.sebi.gov.in.
Securities Contracts (Regulation) Act, 1956, No. 42, Acts of Parliament, 1956 (India).
The Securities and Exchange Board of India Act, 1992, No. 15, Acts of Parliament, 1992 (India).
