India’s stock exchanges now host over 2,671 listed companies with a combined market capitalisation exceeding Rs438.9 lakh crore, or roughly $5.1 trillion, as of December 2024. The National Stock Exchange alone fields over 11 crore unique registered investors. By every quantitative measure, Indian capital markets have undergone a transformation since the early 1990s. Yet the regulator tasked with keeping these markets honest, the Securities and Exchange Board of India, increasingly resembles an institution built for a simpler world and left to manage a vastly more complex one. The gap between India’s market ambitions and SEBI’s regulatory capacity is not merely a technical inconvenience. It is a structural vulnerability that benefits those with the sophistication to exploit it.
A Regulator Born of Crisis
SEBI was created in 1988 as a non-statutory body, elevated to statutory authority on 30 January 1992 through the SEBI Act, 1992. Its establishment was itself a response to crisis. Before SEBI existed, the Controller of Capital Issues managed market oversight under the Capital Issues (Control) Act, 1947, a regime utterly unsuited to a market that was beginning to open up. The Harshad Mehta scandal of 1992, which exposed how brokerages could manipulate the banking system through ready-forward contracts to inflate share prices on a massive scale, made clear that India needed a dedicated securities regulator with real teeth.
SEBI was given three sets of powers rolled into one body: quasi-legislative (it drafts its own regulations), quasi-executive (it investigates and enforces), and quasi-judicial (it passes rulings and orders). This trinity of authority was designed to allow the regulator to move fast, and in the early years, it did. The introduction of the T+5 rolling settlement cycle in July 2001, compressed to T+3 in April 2002 and then to T+2 in April 2003, was a systematic effort to modernise settlement infrastructure and reduce counterparty risk. The Depositories Act, 1996, eliminated the physical share certificate, removing an entire category of fraud, postal theft, and administrative burden. These were genuine achievements, and they laid the groundwork for the market modernisation that followed.
The Market That Grew Up Around It
The problem is that Indian capital markets did not stand still. The NSE, incorporated in 1992 and operational from 1994, was the first Indian exchange to introduce electronic trading. Within a year of its equities launch, its daily turnover exceeded the Bombay Stock Exchange’s. Currency derivatives followed in 2008. By 2024, the NSE was the world’s largest derivatives exchange by number of contracts traded and the third largest in cash equities by number of trades. India became a top-five global equity market by retail participation and IPO volume.
Each expansion of market complexity created new regulatory surfaces that SEBI had not anticipated. The emergence of algorithmic and high-frequency trading strategies made surveillance harder. The growth of the mutual fund industry pushed retail money into instruments whose risk profiles were not always transparent. The rise of composite exchange-traded products, hybrid debt-equity structures, and offshore fund vehicles using complex beneficial ownership chains created regulatory territories that did not map cleanly onto SEBI’s original mandate.
The numbers tell the story of regulatory strain. SEBI now oversees 20 departments managing everything from Takeover Regulations Advisory Committee to Corporate Bonds and Securitisation Advisory Committee. It operates with a nine-member board, nominated by the Union Government, including two members from the Finance Ministry and one from the Reserve Bank of India. The chairman as of March 2025 is Tuhin Kanta Pandey, who took over from Madhabi Puri Buch whose term ended in February 2025. SEBI’s regional office count, which stood at 17 as recently as June 2023, was reduced to a single office as part of a restructuring exercise. The regulator that was given a country to watch was gradually losing its eyes in the field.
The Turf-War Architecture
India’s financial regulatory structure is not a system so much as a collection of adjacent silos. SEBI regulates securities and commodity markets. The Reserve Bank of India governs banking and payments. The Insurance Regulatory and Development Authority of India handles insurance and reinsurance. The Pension Fund Regulatory and Development Authority oversees pension funds. Each authority has a defined domain, but the domains overlap in precisely the places where modern finance is most dynamic.
Consider the regulatory gaps that have opened around hybrid instruments. Structured products that combine debt features with equity-like returns, or investment vehicles that sit at the intersection of banking and securities regulation, frequently fall into the gaps between these agencies. The IL&FS crisis of 2018, which revealed that a systemically important financial institution had been borrowing heavily from banks and markets while its debt obligations remained outside any single regulator’s full purview, exposed the consequences of this fragmentation. No single regulator had complete visibility. SEBI could see the securities side. RBI could see the lending side. Neither had the full picture until the crisis was already underway.
This regulatory architecture was not designed by accident. It reflects a political economy choice, made over decades, to preserve agency domains and avoid the concentration of power that a single super-regulator would require. The result is that pockets of the financial system operate in partial regulatory vacuum, and those with the resources to structure products across agency boundaries profit from that vacuum.
Enforcement: The Record That Haunts the Record
SEBI’s enforcement record is where its structural weaknesses become most visible. The regulator has been criticised for failing to prevent or promptly detect major financial frauds, including the Satyam accounting scandal, the Punjab National Bank fraud involving Nirav Choksi and Mehul Choksi, the IL&FS debt crisis, and the NSE co-location manipulation case in which certain brokers were alleged to have gained preferential access to exchange servers through corrupt arrangements.
Insider trading remains a persistent problem. Despite regulations on paper, the ability of well-connected individuals to trade on material non-public information has not been effectively curtailed. SEBI’s own former whole-time member, Dr. K. M. Abraham, wrote to the Prime Minister in explicit terms that the regulatory institution was under severe attack from powerful corporate interests operating concertedly to undermine SEBI, and that the Finance Minister’s office was attempting to influence enforcement cases involving the Sahara Group, Reliance, Bank of Rajasthan, and MCX. The letter, describing what he called a “malaise,” was a remarkable public admission from inside the organisation.
Market manipulation in small-cap and mid-cap stocks continues to be a recognised problem. Pump-and-dump schemes targeting less liquid securities, where false or misleading statements inflate a stock’s price before insiders sell at the peak, remain prevalent. SEBI’s own cited reasons for this failure include limited resources, reliance on stock exchanges for market data, a lack of comprehensive legal framework with stringent penalties, slow response times, and poor coordination with other regulatory bodies. These are not minor operational quibbles. They are a description of an institution that is structurally underpowered relative to the market it governs.
The Takeover Regulations, which govern how acquirers must disclose and proceed when accumulating significant stakes in listed companies, have been criticised for offering excessive discretion to the regulator and for favouring incumbent managements who can use regulatory processes to delay or block takeovers. The appellate process through the Securities Appellate Tribunal, a three-member body currently headed by Justice Tarun Agarwala, provides some accountability, but the volume of cases and the time required to reach decisions means that enforcement is often slow enough to reduce its deterrent effect.
The Hindenburg Shadow
In August 2024, short-selling firm Hindenburg Research accused SEBI Chief Madhabi Puri Buch and her husband of holding stakes in offshore entities that allegedly invested funds used to artificially inflate shares of companies owned by the Adani Group. The timing was politically explosive: SEBI had been investigating beneficial ownership questions in Adani-related offshore funds, and the regulator’s own chair was now named in a short-seller’s report alleging conflicts of interest. The Leader of the Opposition called for her resignation. Buch denied the allegations. But the episode illustrated a deeper problem: when the regulator’s own integrity is in question, the institutional credibility that enforcement depends upon is already compromised.
The Reform Agenda That Cannot Wait
India’s capital markets deserve better than experimental regulation that reacts to crises rather than anticipating them. The reform agenda is well understood, even if it is routinely deferred.
First, statutory boundaries between SEBI, RBI, and IRDAI need to be redrawn with clarity, not through informal memoranda of understanding that carry no binding force. Hybrid instruments and conglomerate financial structures require a lead regulator with cross-sectoral visibility, or a formal mechanism for coordinated action that does not depend on goodwill between agency heads.
Second, SEBI’s rule-making process needs greater transparency. Quasi-legislative power without meaningful public consultation invites regulatory capture, where the rules that get written reflect the interests of those with the most sophisticated access to the process. The recent consultation paper on retail investor incentives in corporate bonds, issued in October 2025, was a step in the right direction, but consultation papers are not a substitute for structural reform of how regulations are drafted and reviewed.
Third, the appellate process needs strengthening. The Securities Appellate Tribunal handles a significant caseload with limited membership. Delays in adjudication reduce the cost of non-compliance for those with the resources to litigate. A better-resourced, faster appellate process would restore deterrence.
Fourth, SEBI’s enforcement capacity requires investment. The closure of 16 of 17 local offices is a statement of prioritisation that should be revisited. Surveillance systems need to keep pace with algorithmic trading. Resources for insider trading investigation need to be commensurate with the scale of the problem.
India’s capital markets are too large, too internationally visible, and too important to the country’s economic future to be regulated by an institution that is perpetually in reactive mode. The investor who buys a mid-cap stock on the NSE deserves the same regulatory protection as the institutional player who trades derivatives. Without structural reform of how SEBI operates, India risks precisely the outcome that its regulatory architecture was designed to prevent: a market that works well for those who know the rules from the inside, and poorly for everyone else.