Protection vs Regulation

Narayan’s reflections began with an acknowledgment of the complexity of SEBI’s role. "If you look at the press, it appears SEBI is this watchdog with a stick looking to beat up people. That's only a very small part of the role," he remarked. Yet, the deeper, often underappreciated responsibility of Sebi is to ensure the sustained growth of the capital markets by striking the right balance between two regulatory pitfalls: Type 1 errors—allowing malpractices like those seen in infamous financial scams—and Type 2 errors—over-regulating to the point where genuine businesses find it impossible to thrive.

"As regulators, we are petrified of any type one error and we want to avoid it at all points of time," Narayan admitted. Yet, he was quick to note the risks of overreach: "In our zeal to prevent type one errors, we could end up creating a regulatory framework so onerous that even good people cannot do business." Through consultation with market participants, Narayan believes it is

possible to minimise both errors—a challenge that becomes even more critical as markets evolve with emerging technologies such as AI, quantum computing, and advanced robotics.

The Startup Dilemma

Narayan’s reflections also touched upon the recent struggles of new-age IPOs, many of which are trading below their issue prices. Despite these setbacks, he cautioned against dismissing the entire sector—a sentiment he captured succinctly. “Startups, by nature, are risky ventures, but they are also the engines of future innovation and economic transformation,” said Narayan.

For India to remain competitive in the global startup ecosystem, it’s essential that these ventures continue to access growth capital. "People who are risk aware, discerning, and financially secure should be allowed to take on this risk without the regulator worrying too much about investor protection," Ananth suggested. Here, accredited investors—those with financial sophistication and the resources to absorb high-risk investments—can play a pivotal role in funding high-growth ventures.

Unlike retail investors, who may need stringent safeguards, accredited investors understand risk management and can afford to back ventures with uncertain returns. Narayan questioned whether these seasoned investors truly require the same level of protection as a retail mutual fund investor contributing "₹250 through an SIP." Allowing accredited investors to take calculated risks could provide much-needed growth capital for startups without compromising investor protection standards meant for the broader retail market.

"Making that distinction and ensuring that accredited investors are allowed to seamlessly invest and fund growth into startups might be one way to ensure that we join the rest of the global ecosystem in leading the change, rather than following the change," Naryan argued. By enabling greater freedom for accredited investors, India could foster a more dynamic and innovative startup landscape that rivals global leaders.

Risk Awareness

The heart of Narayan’s argument lies in fostering a culture of risk awareness. "The more you trade as an individual, the less you make," he warned, pointing out that frequent trading often leads to losses for retail investors, whether in futures and options (F&O) or in cash markets. Without the institutional heft of high-frequency algorithms and advanced analytics, retail investors often face an uphill battle.

Investors must first understand their risk appetite, which, as Narayan highlighted through personal reflection, is deeply individual. "I come from a reasonably humble background. I've seen hard days growing up, so I cannot take risks. My risk appetite is naturally lower," he shared. Recognising this, investors should focus on diversified asset allocation—a principle rooted in Harry Markowitz’s Modern Portfolio Theory, which champions diversification as the closest thing to a free lunch in investing.

Ananth Narayan’s views make it clear that SEBI’s mission is not just about creating access but fostering responsible inclusion. Narayan’s concern wasn’t about discouraging participation but ensuring that investors, particularly retail investors, are adequately prepared for the inherent risks of the securities market. "It is your hard-earned money. You are free to do as you please but be aware of the risks. It is this risk awareness strategy and getting investment strategy that will be a crucial part of our journey as we go along," summed up Narayan.

India stock market regulation

Why Sebi is uncomfortable about the frenzied pace of financial inclusion in capital markets