‘Sebi curbing risk in F&O, aiding capital formation’

At the 17th Mint BFSI Summit & Awards, Narayan outlined the regulator’s response to the frenzy in futures and options, by implementing targeted measures to curb egregious overtrading, particularly around expiry days. These steps, introduced in October 2024, aimed to address specific risks without burdening the entire F&O market with overly broad restrictions, Narayan said.

However, the regulator was also looking at ways to grow the F&O ecosystem for capital formation, he added. “Even as we judge the impact of these steps over the next few months, we are now looking at ways to grow the F&O ecosystem so that it contributes to price discovery, market depth, risk management, and ultimately, to capital formation,” he said, adding the regulator was looking to improve the risk metrics in F&O.

Capital inflows and securities supply

Narayan also highlighted the remarkable rise in domestic capital inflows. From FY22 to FY24, inflows into equity-oriented mutual funds nearly doubled compared to the previous five years. Between FY15 and FY20, annual inflows into these funds averaged ₹1.4 trillion; however, since covid-19, it has shot up to ₹3.2 trillion annually from FY22 to FY24. In FY25, the amount reached a record ₹4.8 trillion in just nine months, which accounts for over 30% of the new time deposits made by banks during the same period.

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Listed companies raised an average of ₹1.5 trillion annually through new securities between FY22 and FY24. Narayan had previously raised concerns that the supply wasn’t keeping up with demand, potentially causing asset inflation. But in FY25, the supply of new securities surged to ₹2.9 trillion, reducing the gap between supply and demand.

“For capital markets seeking capital formation, this is indeed the best possible outcome – rising demand for and rising fresh supply of securities”, he said.

Navigating challenges

Narayan also spoke about the challenges and fundamental responsibility to preserve and grow the trust of the rising number of investors in the capital markets ecosystem.

One of the key challenges for the regulator, according to Narayan, was preventing “Type-I errors,” such as governance failures, technology lapses, market manipulation and fraud.

“These errors could endanger trust and kill the goose that is laying golden eggs”, Narayan said, adding the risk was too big to be left to regulators alone. The regulator was also vigilant about avoiding “Type-II errors”—over-regulation that might stifle legitimate capital formation. Narayan stressed the importance of finding a balanced regulatory approach, leveraging extensive consultations to address both types of risks effectively.

He also illustrated Sebi’s approach through recent examples involving foreign portfolio investors, alternate investment funds and the derivatives market. About the ongoing scrutiny of FPIs, he said that rather than imposing onerous disclosure requirements on all foreign investors, the market watchdog opted for a focused, risk-based approach that mandated additional disclosures from only those FPIs meeting certain concentration thresholds.

Narayan noted that FPIs required to comply with these new disclosure standards had exited the market by the September 2024 deadline to avoid penalties. Despite concerns from some quarters, he clarified that these measures had not caused a significant outflow of foreign capital.

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Narayan highlighted the impact of the reforms made to streamline FPI registration processes. As a result, FPI registrations have surged, with an average of 130 new registrations per month in FY25—almost double the rate seen in FY24, he said.

Robust regulatory frameworks

Turning to AIFs, Narayan emphasized the sector’s rapid growth and Sebi’s efforts to ensure that the regulations around AIFs are robust enough to prevent circumvention of financial sector rules without stifling growth. Sebi introduced clear guidelines for AIF investment managers, including rules for dematerialization of assets and investor units, and the allowance for certain structural flexibilities.

Despite the encouraging trend, Narayan cautioned against complacency for continued efforts to expand investor participation in capital markets and foster a culture of trust and transparency.

“The current trajectory of growth in both demand and supply of capital is the best possible outcome for the economy,” he said. “But we must remain vigilant and continue to ensure that the ecosystem remains transparent, efficient, and resilient.”

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In conclusion, Narayan underscored the critical role of Sebi and its stakeholders in navigating the delicate balance between regulation and capital formation. With continued vigilance and collaboration, he believes India’s capital markets will remain a key engine for economic growth in the years ahead.