(Part 2)
Why SEBI has limited success?
India’s stock market regulator SEBI, tells a story of good intentions paving a road to somewhere quite troubling. The journey from the Haridas Mundhra scandal of the 1950s to the Harshad Mehta debacle of 1992 forced India to create SEBI, a regulator with near-absolute power to clean up the markets. The hope was simple: end the scams, protect investors, build trust. But three decades later, SEBI’s approach has produced an outcome nobody intended, or perhaps some intended too well.
Ivory Tower disconnected with people
But the deeper issue lies in how SEBI views the very people it claims to protect, and more fundamentally, how it refuses to even listen to them. SEBI operates from an ivory tower, making policy in isolation from the millions of retail investors whose lives those policies shape. There are no online polls seeking investor input on proposed regulations. No systematic feedback mechanisms. No town halls or digital forums where small investors can voice concerns. When SEBI drafts new rules about lot sizes, margin requirements, or trading restrictions, retail investors receive no letter, no email, no survey asking for their perspective. The regulator decides what’s good for them without ever asking what they actually need or experience in the markets.
This isolation isn’t accidental oversight. It’s structural blindness built into SEBI’s DNA. The regulator consults with stock exchanges, brokers, institutional investors, and market intermediaries. These are the voices in the room when policy gets made. They have the access, the connections, the formal channels to SEBI’s leadership. Small investors have none of this. They’re the subjects of regulation, not participants in its creation. SEBI makes rules about protecting retail investors the way Victorian gentlemen made rules about protecting the poor, without ever actually talking to them or understanding their reality.
Biased Policies
This paternalistic stance treats retail investors as children who need to be saved from their own stupidity. The philosophy manifests most clearly in derivatives regulation. SEBI has structured the derivatives market with minimum contract sizes around five lakh rupees per scrip. For Nifty options, that means controlling fifteen hundred shares at a time. The stated reason is investor protection, keeping unsophisticated small investors away from complex, risky instruments they supposedly cannot understand.
This matters enormously because it explains how SEBI ends up with policies that sound protective on paper but prove exploitative in practice. When the regulator decided to keep derivatives lot sizes at five lakh rupees, which small investors pointed out this creates a wealth barrier? Who among retail traders explained that they need hedging tools precisely because they can’t absorb losses the way institutions can?
Nobody, because nobody asked them. The decision got made in rooms where large players whispered about protecting unsophisticated investors from their own foolishness, and no retail voice was there to say actually, we’re sophisticated enough to know we need protection from market manipulation, not protection from protective instruments.
Contradictory policy
The absurdity becomes apparent when you compare this to the cash market. A retail investor with fifty thousand rupees can walk into the stock market and buy five hundred shares of a company, taking full downside risk if the price crashes. But that same investor cannot buy a protective put option to limit that downside because the minimum contract size is five lakh rupees. So SEBI protects retail investors by preventing them from actually protecting themselves. The regulator saves people from risk management tools while allowing them full exposure to unhedged risk. It’s a logic that eats itself, but it persists because the people it harms have no voice in the room where it was created.
This creates a two-tier market that operates on fundamentally different terms for different participants. Large investors and institutions can hedge their positions, deploy sophisticated options strategies, and manage risk efficiently across both cash and derivatives markets. They have access to the full toolkit of modern finance. Small investors, meanwhile, are forced into unhedged cash positions, more vulnerable to crashes, unable to use the very instruments that could safeguard their capital. SEBI claims to protect the small guy while structurally disadvantaging him at every turn, and the small guy has no mechanism to tell SEBI this is happening.
Aptitude of Small Investors
The Finance Minister herself has gone on record stating that India’s retail and small investors, along with domestic institutional investors, are holding the market stable by offsetting sales by foreign institutional investors. When FII money flees during global turbulence or risk-off periods, it’s the steady hands of retail that prevent catastrophic crashes. This isn’t speculation or theory. It’s an official acknowledgment from the highest levels of government that retail investors are the backbone of market stability.
Yet SEBI, operating under the same government, maintains policies that treat these stabilizing retail investors as incompetent fools who must be banned from derivatives for their own good. The contradiction is staggering. The Finance Ministry praises retail as heroes while SEBI locks them out of the tools they need to defend themselves. And because SEBI never asks retail investors what they think, the regulator remains blissfully unaware of, or indifferent to, this disconnect between rhetoric and reality.
This exclusion creates something worse than mere unfairness. It enables systematic exploitation. Large speculators operate a pump-and-dump mechanism that SEBI’s own policies facilitate. The pattern is brutally simple. Big players accumulate shares in the cash market, driving up prices. Retail investors, seeing momentum and unable to access hedging tools, pile in with their unprotected cash positions. Meanwhile, the large speculators, enjoying monopoly access to derivatives, load up on short positions or sell massive quantities of call options. Then comes the dump. They offload their cash holdings, prices crash, and they collect enormous profits on their derivative positions. Retail investors, trapped without hedges, get slaughtered.
Design of doom
SEBI watches this happen repeatedly and claims helplessness. But there’s nothing natural or inevitable about this dynamic. SEBI designed it. By creating high barriers to derivatives access, the regulator handed large speculators a monopoly on the most powerful tools in the market. It’s like putting deer in a forest, removing their antlers, then expressing concern when armed hunters massacre them. The system isn’t failing to protect retail investors. The system is structured to prevent retail investors from protecting themselves while enabling large players to hunt them efficiently.
If SEBI actually engaged with retail investors, if it ran surveys or held open forums or simply sent emails asking what problems people face in the markets, this pattern would become impossible to ignore. Thousands of small investors would say the same thing: we need access to hedging tools, we’re getting picked off by large players who can use derivatives while we can’t, the lot sizes are designed to exclude us. But SEBI doesn’t ask, so it doesn’t have to hear. The ivory tower remains pristine, its view unobstructed by inconvenient ground-level truths.
Solution
The solution is obvious, which makes SEBI’s refusal to implement it all the more suspicious. If retail investors had meaningful access to derivatives through reasonable lot sizes, say contracts covering ten or fifty shares instead of fifteen hundred, the entire dynamic would shift. Distributed hedging across thousands of small investors would create smoother, less concentrated risk. Large speculators couldn’t easily manipulate markets when retail could take opposite positions as counterparties. The same investors the Finance Minister praises for bringing stability to cash markets would extend that stability into derivatives. The pump-and-dump scheme becomes dramatically harder when your victims can defend themselves.
Why won’t SEBI act? Two explanations present themselves, neither flattering, but both rooted in that fundamental isolation from retail voices. The first is regulatory capture. Large institutional players benefit enormously from retail exclusion. They maintain their edge, their monopoly on sophisticated tools, their ability to hunt defenseless prey. When they whisper in SEBI’s ear about protecting poor retail investors, what they really mean is keep them out so we can keep exploiting them. And because only their voices reach SEBI’s corridors, that’s the perspective that shapes policy.
The second explanation is ideological blindness enabled by isolation. Perhaps SEBI genuinely believes, despite all evidence including the Finance Minister’s own statements, that retail equals dumb money requiring protection from itself. This patronizing view persists because the regulator never interacts with retail investors who could demonstrate their sophistication, their understanding of risk, their need for proper tools rather than blanket bans. When you make policy about people without ever talking to them, you end up with stereotypes instead of understanding. SEBI’s view of retail investors isn’t informed by data or dialogue. It’s informed by assumptions that go unchallenged because the people who could challenge them have no seat at the table.
The result is a regulatory framework that claims one thing while doing the opposite. SEBI says it protects investors but structures markets to expose them. It says it prevents fraud but creates conditions where manipulation thrives. It says it wants fair markets but enforces rules that entrench inequality. The regulator born from the Mundhra and Mehta scandals, armed with near-absolute power to clean up Indian finance, has instead built a system where the Finance Minister praises retail for market stability while SEBI ensures retail can only provide that stability by bleeding during manipulated crashes they cannot defend against.
This isn’t protection. It’s sanctioned exploitation dressed in the language of investor safety. SEBI’s high derivative lot sizes aren’t a bug in the system. They’re a feature, maintaining market stratification while claiming moral authority. The dream of a scam-free market that drove SEBI’s creation remains unfulfilled not because the regulator lacks power, but because it wields that power in isolation from the very people it claims to serve, listening only to the voices that benefit from the status quo.
The Failure of SEBI
Until SEBI breaks down its ivory tower and creates real channels for retail investor input, until it runs polls and seeks feedback and actually reads the letters it never bothers to send, the disconnect will persist. The regulator will keep making rules based on protecting retail investors from themselves rather than from the large players exploiting them. It will continue believing it knows what’s best for people it never talks to, implementing protections that feel like prison bars to those trapped behind them. The deer will keep losing their antlers, the hunters will keep celebrating another successful season, and SEBI will keep wondering from its tower why the forest floor is covered in blood despite all its well-meaning rules.
You can’t protect those you refuse to hear. And if those you do hear profit from the action, the protection turns into a lie that hides betrayal.