From Boiler Rooms to Broadcasting: SEBI Needs a Stronger Hold on Finfluencers

I have a piece with Aniket Singh Charan and Yash Vardhan in today's Financial Express on SEBI's Hobson's choice on dealing with new age manipulation, the likes of pump and dump schemes. The difference from older similar schemes is the scale -as it is now far easier and cheaper to reach millions of investors, who are often ready to be duped with free money schemes or easy 'tips'. The problem is as much as investors to be aware as is SEBI's to enforce. The full piece is as below:

The weapons of financial deception may have evolved, but the script remains drearily familiar: misinformation, manipulation, and a trail of burned retail investors. The Securities and Exchange Board of India recently passed an order in the pump-and-dump case involving Sadhna Broadcast Limited (SBL), shedding light on how digital platforms are now central to such schemes. Today's con artists have swapped cold calls and call centres for content creators and clickbait thumbnails with the result their reach has grown exponentially.

A pump-and-dump scheme involves artificially inflating the price of a stock using false or misleading information, only for manipulators to sell off their holdings at the peak, leaving retail investors with steep losses. In the SBL affair, SEBI uncovered an orchestrated campaign of circular trading and deceptive YouTube videos, with a scripted price action. 

It began with promoters and related entities engaging in circular trading—essentially tossing the stock back and forth among themselves to create the illusion of market activity. With SBL’s shares suffering from low liquidity, even small volumes could cause large price movements. Enter stage left: the “finfluencers.” YouTube videos, peddled by certain notices, promoted SBL as the next multi-bagger, dressed up in the language of financial literacy but dripping with hype and half-truths.

Retail investors, seduced by visions of quick returns and slick presentations, poured in. The exit liquidity provided by their enthusiasm allowed the manipulators to “dump” their shares with perfect timing—a wolf in sheep’s clothing disguised as a financial guru.

SEBI’s order in the SBL case connected the dots between price manipulation, paid digital promotions, and the orchestrated dump of shares. The regulator ordered disgorgement, imposed monetary penalties, and barred several individuals and entities from the market. These measures send a strong message that such conduct will not go unpunished. However, such regulatory actions are remedial and retrospective by their nature. 

Not long ago, these schemes lived in the shadows of boiler rooms and SMS spam campaigns. Their reach was limited by manpower and mobile networks. Today’s digital ecosystem, however, lets financial misinformation scale with frightening ease. Finfluencers—part educator, part entertainer, and occasionally part illusionist—now command audiences in the millions, often with little more than a Wi-Fi signal and an alarming degree of confidence.

It is therefore pertinent to note that in an age where pump-and-dump schemes are amplified by finfluencers and social media campaigns, ex-post facto enforcement is necessary but not sufficient. SEBI’s task is undoubtedly difficult. The primary challenge in regulating such platforms and content lies in distinguishing financial literacy content from investment advice. The distinction between the two often collapses when creators promise guaranteed returns or package unverified claims as credible investment ideas. Similarly, it is important to preserve free speech and distinguishing it from investment advice can be hard. Imagine if all stock specific views were considered investment advice, then an Indian Warren Buffet talking about Coke as a great investment with great potential would be considered illegal .

SEBI has attempted to regulate this space by imposing obligations primarily on registered intermediaries and regulated entities to verify their identities with online platforms before publishing investment-related advertisements – where the regulator has in fact gone too far in over-regulating. The intent here is to curb fraudulent promotions and ensure that only verified entities publish financial content. Furthermore, SEBI has issued directives restricting the nature of content that can be disseminated. For instance, a circular prohibits finfluencers from using live stock prices in their educational content, mandating instead the use of price data that is at least three months old. This is intended to prevent "educational" platforms from being subtly used to provide time-sensitive, unregistered investment advice. Regulators globally agree on preventing publication of unregulated financial content online. 

We are not unsympathetic to the challenges faced by SEBI in this task, particularly in regulating the distribution of such content through encrypted platforms like WhatsApp and Telegram. However, with respect to other non-encrypted social media platforms such as YouTube, Twitter, etc. there is a growing consensus that such platforms must assume greater responsibility for the financial content they host. This includes implementing robust and proactive mechanisms for identifying, flagging, and removing misleading or fraudulent financial promotions. In India, the Information Technology Act, 2000, provides a "safe harbour" to intermediaries (social media platforms in this case), absolving them from liability for third-party content hosted on their platforms, provided they comply with prescribed due diligence requirements. In this regard, while SEBI has undertaken consultations with such platforms, there is a need to prescribe a formal and public mechanism for faster takedown of content that is violative of extant laws, clearer definitions of harmful financial promotion, stricter verification procedures and due diligence thresholds for paid financial promotions and marketing campaigns, and formal cooperation between platforms and financial regulators. 

Ultimately, the strongest line of defence is an informed investor. Regulatory frameworks, platform accountability, and enforcement actions must be complemented by financial literacy efforts that teach skepticism as much as they teach strategy. How often does anyone walk upto you in a market place handing over 500 rupee notes? It is about almost as probable that anyone would give you free advice on the internet or other channels on how to find underpriced assets. We live in a financial ecosystem where every smartphone is a trading terminal, and every influencer a potential advisor.

But the problem is deeper than mere manipulation—it’s one of trust. Retail investors are increasingly relying on internet personalities rather than regulated advisors, not because they are foolish, but because the former speak in plain English, not financial Esperanto. The accessibility and relatability of finfluencers give them credibility, sometimes more than the institutions themselves. This is both a strength and a danger.

Moreover, the monetization model of these platforms is complicit. Algorithms that reward engagement do not pause to verify the truth. A video hyping a penny stock might receive ten times the traction of a cautious explainer on index funds. The system is tilted in favour of the loud, not the learned. In essence, we need a modern-day financial Hippocratic Oath for those dispensing advice—first, do no harm. Until then, perhaps investors would do well to remember: not every ‘expert’ with a ring light and a YouTube channel is looking out for your wealth. Sometimes, they’re just chasing theirs.

Clear Lines of Independence: Rethinking the Ownership of India’s Clearing Corporations

I have a piece in today's Financial Express with Navneeta Shankar and Pranjal Kinjawadekar on the market micro-structure of Clearing Corporations - the heavy lifter, but uncelebrated, in the exchange ecosystem which ensures securities and money move without nearly any risk. The recent proposal of SEBI to push for diversified shareholding may not be a panacea and may in fact cause problems in the future. As Socrates said: a slave with two masters is free. Here is the full piece: 

 

The long-delayed listing of the National Stock Exchange (NSE) has once again taken center stage – not due to valuation hurdles or market sentiment, but because of a deeper, structural concern. This seemingly narrow issue is, in fact, a flashpoint in a larger conversation about how India governs its market infrastructure institutions.

While stock exchanges are always under the market glare, with upticks and downticks discussed breathlessly every micro-second on electronic media, the real grunt work is done by the arcane institution called clearing corporation. These are the entities which transfer funds and securities and manage risk and collateral. They also act as guarantors to every trade, acting as a buyer to every seller and as a seller to every buyer. They work under immense pressure managing both concentrated risk and hard timelines. Though, not celebrated, they are the unseen heroes who ensure the stock markets don’t suffer even if multiple large traders default at the same time. In a way, their lack of limelight is a good sign of health for the markets.

Under the current regulatory framework, clearing corporations must be majority-owned by one or more recognized stock exchanges. This 51% minimum holding was designed to ensure close coordination between trading and post-trade infrastructure. The introduction of interoperability in 2018 between clearing corporations brought in added competition.

In November 2024, SEBI proposed a reimagination of this structure through two alternative models depending on the applicability of the Payment and Settlement Systems (PSS) Act, 2007. The PSS Act brings all payment and settlement service providers under the Reserve Bank of India’s (RBI) regulatory framework. However, clearing corporations are currently excluded from its purview—largely because they remain majority-owned by SEBI-regulated stock exchanges. If this ownership structure is diluted, the rationale for their exclusion becomes less certain, raising the question of whether such clearing corporations should then fall under RBI’s supervision.

But whether diversified ownership automatically translates into institutional independence remains an open question. Replacing a single dominant shareholder with a loose federation of financial entities does not necessarily eliminate conflicts. In fact, large financial institutions and banks owning the clearing corporation introduces new conflicts between ownership and users. Banks or their subsidiaries would have multiple roles in the clearing ecosystem including as bankers, clearing members, custodians to name three. A 100% exchange-owned clearing corporation is at the very least structurally answerable to a single, regulated entity with reputational skin in the game. Not just skin, but virtually every organ. Fragmented ownership, in contrast, may lead to diluted responsibility and strategic drift, especially in times of market stress. Socrates said that a slave with two masters is free. Thus, a clearing corporation with a dozen owners would be free as well, free of accountability and responsibility.

This brings into focus a critical question: Is the goal structural independence or effective accountability? If it is the latter—as it should be—then the solution must go beyond just rebalancing shareholding patterns. It must address the real sources of influence and control.

One such source is the boardroom. SEBI’s proposals remain vague on who would govern these newly independent clearing corporations. What would trigger oversight thresholds for influential shareholders? What safeguards would prevent cross-holdings from intermediaries with commercial interests elsewhere in the market? Without clearly defined caps on board composition, voting rights, and conflict mitigation, diversified ownership could become a shell exercise, less a check on power than a redistribution of it into a vacuum. A range of newly introduced conflict of interest would require hundreds of pages of rules on minimising such conflicts.

There is also the fundamental issue of capitalisation. Clearing corporations are not passive entities; they are capital-intensive institutions, expected to invest heavily in technology, risk management systems, and, most importantly, in their Settlement Guarantee Fund (SGF)—the second-last line of defence in case of a broker default. As of April 2025, NCL’s contribution to the SGF stood at ₹12,083 crore, the bulk of it funded by NSE and NCL from their pockets. If parent exchanges are mandated to exit and these institutions are spun off into independent, diversified entities, it is unclear who will step in to meet future capitalization needs.

SEBI assumes that clearing corporations will remain viable, profit-making entities without needing to raise investor-facing fees. But this assumption may prove overly optimistic.

International examples offer no clear blueprint. While entities like DTCC and Euroclear have diversified ownership, others like LCH and ASX Clear remain exchange-owned. Moreover, many such global clearing corporations benefit from different capital frameworks, public guarantees, or deeper institutional markets. Importing their structures without contextual calibration may do more harm than good. Most of the entities are regular profit driven entities, with several like DTCC being listed.

SEBI’s concurrent proposal to preserve a multi-entity clearing ecosystem is thus a welcome counterbalance. A diverse clearing landscape ensures competitive discipline, offers market participants more choice, and avoids over-reliance on any single institution. It also serves as a buffer during systemic events. But here again, SEBI must resist the temptation to micromanage outcomes. It should not be prescribing how many clearing corporations India needs. Instead, it should set clear rules of the road and let market forces decide how clearing evolves—whether through consolidation, specialisation, or competition.

What SEBI must continue to do, and do well, is enforce governance standards, ensure transparency, and demand robust capitalisation. Every clearing corporation, regardless of size or ownership, should meet high regulatory thresholds for risk management, operational resilience, and investor protection. That is the essence of good regulation: not directing institutional architecture, but supervising it with rigour, something SEBI has done well over the past quarter century.

Clearing corporations perform a quasi-public function and must be structurally insulated from solely commercial pressures. But ownership is not the problem, and changing it is not the cure. Real independence will come from better governance protocols, functional separation, meaningful user representation, and perhaps most importantly, a regulatory framework that evolves with the market.

Mandating that exchanges fully relinquish control may be a problem rather than a solution. A more market-driven approach, informed by commercial viability, systemic risk, and public interest, may offer a better path forward. After all, institutional resilience depends not just on who owns the system, but on who is accountable when it is tested. Ideally, neither a minimum nor a maximum ownership should be prescribed and it should be left to the market to decide which model to adopt. Clearing corporations should of course be very intrusively regulated and supervised and be run more as a utility. Finally, it would be a bit unwieldy for one regulator to supervise the clearing corporation which is otherwise regulated and understood by another. Recall what Socrates said.

Brokers get a side hustle

I have a piece in yesterday's Financial Express with Navneeta Shankar and Manas Dhagat on the important reform brought by the Finance Ministry - which increases the regulatory perimeter allowed to brokers, who can now do more allied businesses (without jeopardising client interest). 

India’s broking industry has long operated under a framework that restricted its ability to diversify or expand, despite evolving client expectations and the changing nature of financial services. New-age investors increasingly prefer platforms that offer a full range of financial services, beyond just stock trading. For decades, Rules 8(1)(f) and 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957 (SCRR), imposed a blanket prohibition on brokers from engaging in any business outside securities or commodity derivatives. This regulatory architecture, rooted in a different era of market activity, came under increasing stress as new-age brokers evolved into multi-service platforms, competing not only with peers but also with fintechs, NBFCs, and wealth managers.

In a significant move poised to recalibrate the regulatory perimeter for brokers, the Department of Economic Affairs (DEA) has now issued a gazetted notification dated 19 May 2025, amending Rules 8(1)(f) and 8(3)(f). The amendment clarifies that investments made by brokers from their own surplus funds will no longer be deemed as engaging in “business” – provided they do not involve client assets or create financial liability for the broker. This change addresses longstanding ambiguity that had clouded investment activity, particularly in group entities and other adjacent sectors. 

Rules 8(1)(f) and 8(3)(f) of the SCRR have long stifled brokers, restricting them from engaging, either as principal or employee, in “any business” other than that of securities or commodity derivatives, except as a broker or agent not involving personal financial liability. The intent was to ensure that a broker, whether applying for admission to a stock exchange or already registered, did not expose itself to unrelated business risks that could compromise client interests or undermine market stability. The purpose was straightforward: to ring-fence client assets and ensure that a broker’s other activities do not undermine its core responsibilities in the capital markets.

But over the years, these rules began to suffer from excessive literalism, and the lack of clarity over what would “any business” entail and left the phrase vulnerable to increasingly restrictive interpretations for brokers. A series of circulars issued by the National Stock Exchange, probably with SEBI’s directions, in 2022 — to clarify the scope of permissible activity — went on to prohibit brokers from investing even in group companies engaged in non-securities businesses. These included passive, capital-only investments made from retained earnings, and not involving client funds. The circulars expanded the scope of “any business” so broadly that virtually any strategic capital allocation outside traditional broking could be construed as a violation.

The result was not only interpretive overreach but also regulatory uncertainty. The distinction between business operations and capital deployment began to blur, making it difficult for brokers to determine what was permissible and what was not. This interpretation found its way into enforcement actions and market-wide compliance pressure, pushing brokers into a position where even commercially sound decisions became regulatory risks. 

In one such high-profile case, Kotak Securities challenged NSE’s circular before the Bombay High Court, arguing that the stock exchange had no legislative mandate to effectively rewrite the contours of Rule 8 or, consequently, to direct Kotak to submit a restructuring plan over its legacy investments. Interesting, the Ministry of Finance through its department of economic affairs, in its affidavit before the court, endorsed this view, emphasizing that interpretative or substantive changes to the SCRR could only be made by the Central Government itself. Importantly, the DEA in its affidavit drew a critical distinction between doing business and making investments, noting that the former entails recurring engagement and financial liability, whereas the latter, when ring-fenced and responsibly managed, did not pose systemic risks. 

Recognising the operational challenges created by the earlier regime, the DEA issued a consultation paper in early 2025 to revisit the rule. It acknowledged that the broking ecosystem had moved beyond traditional models and now demanded flexibility to manage surplus funds, expand services, and grow responsibly. Importantly, the paper argued that blanket prohibitions on investment were excessive, particularly when brokers were already segregating client assets under SEBI’s framework. This ultimately paved the way for public feedback, evaluating whether the long-standing interpretation of Rules 8(1)(f) and 8(3)(f) had outlived their regulatory utility, eventually culminating into the new amendment.

The amendment that follows, strikes a careful balance. It does not dismantle the guardrails around client asset protection, nor does it open the gates to indiscriminate diversification. It simply affirms that investments made by a trading member shall not be construed as engaging in “business,” except where such investments involve client funds, client securities, or arrangements that create financial liability on the broker. This is not a blanket exemption. The carve-out is narrowly tailored, preserving the regulatory objective of protecting client assets and maintaining systemic integrity. What it does change, however, is the treatment of surplus fund deployment. Brokers may now invest in group companies or other businesses, provided such investments are made using proprietary funds, do not lead to contingent liabilities, and are routed through appropriate corporate structures.

For the broking industry, this reform brings both relief and opportunity. Diversification into non-securities businesses can provide brokers with additional sources of revenue, thereby reducing their dependency on market-linked income. Restricting them to narrowly defined securities-related activities not only stifles innovation but also distorts competition, especially against unregulated or differently regulated players such as fintech platforms, NBFCs, or wealth managers. The ability to invest in adjacent verticals offers brokers a path to diversify revenue streams and reduce reliance on transaction-linked income. For instance, a group entity may provide tax planning, estate advisory, or loan distribution services, which complement core broking activities but fall outside the regulatory definition of securities business. This, in turn, enhances financial resilience, particularly in cyclical markets where trading volumes may fluctuate sharply.

For too long, the interpretation of Rule 8 was guided by maximum compliance rather than risk-based assessment. This change marks a shift towards regulatory proportionality – where conduct is assessed based on its effect on market integrity and investor protection. For a sector that plays an increasingly important role in capital intermediation, especially among retail investors, this course correction was overdue. It reinforces the principle that regulation must keep pace with innovation, not to encourage risk, but to avoid rigidity. The government’s move to realign regulatory intent with market realities is an example of responsive governance that listens to market feedback. It not only restores balance but also sets a precedent for financial regulators for evidence-based policymaking, one that preserves the fine balance between prudence and progress.

Meeting the Finance Minister Smt Nirmala Sitharaman

It was an honour to speak to Hon’ble Smt Nirmala Sitharaman on the future of and regulation of financial markets. She was generous with her time, thoughtful and made several keen observations. I presented a copy of my book on Fraud, Manipulation and Insider Trading in the Indian Securities Market.

Ghosts in the Order Book

I have a piece in today's Financial Express with Rashmi Birmole and Pranjal Kinjawadekar on the somewhat novel fraud 'spoofing'. Here is the link to the original article and the full piece:  

The stock markets have come a long way from the days of the open outcry system. Offers and bids for stocks, once shouted or hand-signaled on trading floors, now reside in electronic and anonymous order books. These books reveal more than just orders, they provide crucial information on bid-offer balance, market depth and the prices traders are willing to accept. Order books offer a glimpse into the push and pull of the market - a vital piece of the mosaic of information that shapes market prices. However, this leaves the order book open to manipulation or ‘spoofing’, a practice that usually involves placing non-bona fide orders of large quantity on one side of the market, while attempting to execute a bona fide order on the other side. 

For instance, a trader places buy orders for huge quantities of ‘X’, but at a price that’s lower than the market price. The probability of his orders getting filled is fairly low, because common sense dictates that no seller would sell lower than the market. The bid, however, which may make up a sizeable portion of the order book, may signal higher demand for ‘X’ leading to other traders selling X at higher prices. The manipulative element kicks in when the trader also places a sell order at these prices, which are higher than they would have been if not for his own earlier buy orders. These fictitious orders, usually fully visible to the market, are designed to create an artificial impression of demand or supply. These buy orders are then conveniently cancelled after the trader books a profit and true to their name, are nothing more than a ‘spoof’ that the trader has no intention of seeing through.

While spoofing has been frequently reported and penalized in the United States (US), it remains relatively uncommon in the Indian markets. In this context, it is worth discussing the recent interim order passed by SEBI against Patel Wealth Advisors Private Limited (PWAPL), a stockbroker, and its directors, in connection with an elaborate and recurring scheme of ‘spoofing’ across the equity and derivatives segments of the Indian markets. SEBI’s analysis revealed that PWAPL allegedly manipulated the market over 292 scrip contract days spread over 173 different scrips, by placing large fake orders that it never intended to execute. These orders were meant to mislead other investors by creating a false impression of demand or supply. The regulator passed a series of directions against the broker and its directors, including indefinite trading restrictions on PWAPL, the impounding of over ₹3.22 crore in alleged unlawful gains and instructions against disposing of any their assets or properties. 

In the case of PWAPL, SEBI’s investigation found that this strategy was not an isolated tactic but a sustained and repeated pattern. The firm would place large orders at prices far from the current market rate, then immediately place a smaller order on the opposite side at a more realistic price. Once those trades were executed at prices influenced by the spoofed demand or supply, the large orders were swiftly cancelled.  

Seeing how 'spoofing' essentially revolves around manipulated order books, it is important for the regulator to identify the non bona-fide orders and deconstruct the manipulative scheme to satisfy the evidentiary burden of fraud. Since the cancellation or modification of limit orders (before they are executed) is an otherwise permissible activity, the regulator would also need to carve out illegitimate behavior from otherwise legitimate behavior, and identify cancelled orders that were placed with an intent to be cancelled and manipulate. This would require establishing patterns of such behavior and circumstances that indicate an intent to manipulate and the herculean task of sifting through vast volumes of unexecuted order activity, including placements, modifications, and cancellations. In 2025, with average daily orders reaching approximately 16 billion, such manipulations can occur in microseconds, often vanishing before it can be matched or executed.

In this context, SEBI’s action against PWAPL is not just a punitive measure but a reflection of its growing enforcement, surveillance and analytic capabilities. The regulator’s ability to detect and reconstruct these fleeting patterns of conduct signals a shift in its approach—one that is increasingly aligned with the demands of modern, high-speed markets. This isn’t SEBI’s first brush with spoofing. In an earlier case involving Nimi Enterprises, the regulator identified a similar pattern, albeit on a smaller scale. While that case involved fewer trades and lower gains, it served as an important precedent, reinforcing the principle that even in the absence of actual trade execution, conduct that creates a false or misleading appearance of market activity can be penalized. 

 

The U.S. Securities and Exchange Commission (SEC) has tackled similar conduct under the label of “layering”—a specific form of spoofing where multiple fake orders are placed at different price levels to build a false illusion of depth. The U.S. regulators have successfully prosecuted cases under the Dodd-Frank Act, which explicitly prohibits spoofing in commodities and securities markets. This explicit inclusion also empowered the Commodity Futures Trading Commission (CFTC) and the Department of Justice (DOJ) to pursue spoofing not just through fines or market bans, but also through criminal prosecution in 2015, making Michael Coscia, an HFT commodities trader, the first person convicted under this law.

Spoofing and similar misconduct already fall within the broad anti-fraud umbrella of PFUTP regulations. These provisions broadly prohibit fraudulent, manipulative, or deceptive conduct in securities trading. In the above discussed cases, SEBI has successfully demonstrated that even in the absence of a statutory label, spoofing can be penalized when it results in a false or misleading appearance of market demand or supply. This framework enables SEBI to address a range of manipulative behaviours, whether old or emerging, without waiting for legislative catch-up. In a world where technology, algorithmic strategies, and high-frequency trading evolve rapidly, a highly codified regime may risk catching innocent actors in the net. 

As algorithmic and high-frequency trading continue to reshape market dynamics, regulators will be expected to remain equally agile—leveraging surveillance tools, data analytics, and principles-based enforcement to detect and deter abuse. While the call for clearer legal definitions may grow louder, India’s current approach preserves regulatory adaptability without compromising accountability. The key lies in continuing to evolve enforcement practices, increasing transparency, and ensuring that market participants, whether institutional or retail, can trust that the playing field is level.

Why Restrict When You Can Regulate mutual funds?

I have a piece in today's Financial Express, with Navneeta Shankar and Pragya Garg on SEBI's welcome (though informal) announcement to review the scope of what a mutual fund can do - outside of mutual funding :) This will be a reform which has to be carried across all financial intermediaries, specially in areas which do not introduce capital risk - and regulators needs to liberalise across silos of regulators - for example there is wealth management which involves financial products across deposits, securities, gold, insurance and pension. 

At the recent CII Mutual Fund Summit, SEBI Executive Director Mr. Manoj Kumar catalyzed industry optimism by signaling a potential relook at Regulation 24(b) of the SEBI (Mutual Funds) Regulations, 1996. The provision, long seen as a constraint, prohibits asset management companies or AMCs from undertaking fund management activities beyond mutual funds, except through SEBI-approved subsidiaries. It also mandates separate teams for fund management—even for back-office functions. Even some distinction between broad based funds and non-broad based should be done away with so long as it is clean money.

While originally rooted in investor protection and systemic prudence, these restrictions may be misaligned with today’s integrated financial ecosystem. As India’s mutual fund industry surpasses ₹64 lakh crore in assets under management (AUM), it is time to ask whether such constraints are serving or stifling investor interests and innovation.

One of the most glaring missed opportunities is the management of foreign investments. Indian AMCs—despite their competence—are largely excluded from managing India-focused offshore funds, which are instead run from jurisdictions like Singapore or the UAE. The core asset management expertise of Indian fund houses remains underutilized, costing the domestic industry potential leadership in global India-focused capital management. While there are significant tax considerations at play, this piece focuses on the regulatory bottlenecks.

Regulation 24(b) has come to represent the Achilles’ heel of India’s mutual fund ecosystem. Introduced at a time when the primary fear was that AMCs could drift into unrelated businesses, potentially diluting fiduciary obligations, the regulation took a blanket prohibition approach. However, global markets have since matured. Today, asset managers like BlackRock, Vanguard, and Allianz operate across wealth management, advisory, private credit, and fintech—without compromising investor protection—thanks to robust internal governance and transparent disclosures.

In contrast, Indian AMCs are required to establish separate subsidiaries even for closely related businesses. This creates inefficiencies, increases costs, and limits scale—all of which ultimately affect the end investor. Worse, it prevents Indian AMCs from competing globally on equal footing.

The regulatory philosophy must shift. Regulation should be about managing and disclosing conflicts of interest, not banning economic activity. A prohibition-based model, while perhaps necessary in nascent markets, is out of step with today’s sophisticated financial landscape. Conflicts of interest exist across professions—from legal to audit to fund management—and are rarely grounds for outright prohibition. Instead, they are managed through disclosure, transparency, and strong compliance mechanisms.

The United States and European Union offer useful examples. In both regions, mutual fund managers are permitted to diversify their services—provided they ensure client asset segregation, implement robust controls, and disclose conflicts clearly. Regulation in these jurisdictions is designed to build guardrails, not walls. India must consider a similar evolution.

A central reform principle could be client-level segregation. Rather than enforcing structural separation between fund management and ancillary activities, regulators should require operational ring-fencing—through Chinese walls, access control, compliance oversight, and independent audit mechanisms. This is already standard practice in India’s securities broking framework under the Securities Contracts (Regulation) Rules, 1957, and forms the backbone of the Financial Conduct Authority’s (FCA) Client Assets Sourcebook (CASS) in the UK. These frameworks insulate investor assets from systemic contagion without sacrificing operational efficiency.

SEBI itself has evolved in other areas. Merchant bankers, initially restricted to capital market activities, have been allowed to expand into corporate advisory and venture capital, subject to conditions like capital adequacy and periodic disclosures. Similarly, stockbrokers can undertake services such as depository operations and portfolio advisory without the need to float separate legal entities. The key requirement is maintaining client asset segregation and passing periodic audits—not artificial structural divisions.

There have also been course corrections. SEBI’s recent reversal of a proposal to segregate listed and unlisted business lines for merchant bankers is a recognition that structural separation does not always serve investor interest. Another example was SEBI’s earlier misinterpretation of a Central Government rule which allowed brokers to carry out any agency-based securities business without financial liability. It took a government affidavit in court to correct this error. These episodes underscore the need for regulatory restraint and an openness to recalibration.

Relaxing Regulation 24(b) does not mean loosening oversight. On the contrary, it provides SEBI an opportunity to align AMC governance with the broader regulatory ecosystem—through net worth thresholds, enhanced disclosure norms, operational firewalls, and strengthened compliance. This would allow AMCs to scale intelligently, without compromising investor protection.

More importantly, this reform would position Indian AMCs as global players. With a supportive framework, they could manage not just domestic mutual funds, but also cross-border mandates, alternative investment funds (AIFs), wealth management platforms, and fintech-driven models. However, global competitiveness requires more than just permission—it demands cutting-edge infrastructure. Platforms like BlackRock’s Aladdin, which integrates risk, portfolio, and compliance functions, are examples of how technology can amplify scale while enhancing oversight.

India’s mutual fund industry must similarly invest in technological innovation to compete at the global level. SEBI’s role would be to ensure that regulations remain principle-based, technology-neutral, and aligned with global best practices—so that domestic capital is not disadvantaged. There is also a case for simplifying mutual fund rules and master circular which together exceed a thousand pages of law.

Finally, this is not just about mutual funds. India’s financial regulatory architecture remains highly fragmented, with sector-specific silos across insurance, asset management, securities, and fintech. The future lies in cross-functional financial institutions—firms that operate seamlessly across product verticals while respecting domain-level risk protocols. A tiered risk approach can allow regulated entities to offer services across securities, insurance, and non-banking domains, while applying stricter guardrails in areas that fall outside existing regulatory oversight. The current siloed model impedes innovation and stunts the growth of integrated platforms. Enabling regulated entities to expand responsibly—based on risk tiering, disclosures, and capital adequacy—would help India leapfrog into a more efficient, investor-friendly financial system.

In conclusion, revisiting Regulation 24(b) is not just a legal reform—it’s a strategic pivot. It’s about modernizing India’s mutual fund industry, unlocking dormant capabilities, and ensuring that Indian asset managers can finally claim their place in the global sun. A principles-based, risk-managed framework—backed by technology and investor transparency—can make that possible.

Navigating FPI Outflows: India’s Challenge

I have a piece in today's Financial Express with Manas Dhagat and Pranjal Kinjawadekar of Finsec Law Advisors on the FPI outflows. While we cannot control most of the outflows because of global events, there are some changes that we can implement to delay the new norms which are causing some outflow of clean FPI money. The full piece is as below:

The RBI Bulletin for March 2025 noted a sustained foreign portfolio investment outflows exerting considerable pressure on India’s equity markets and contributing to a weakening of the rupee. Data from the NSDL suggests that FPIs sold equities worth ₹1,12,601 crore in February 2025, and outflows continued at ₹30,015 crore in March, with the trend persisting since last year. With the tarrif wars, this situation has further aggravated. Additionally, the number of registered FPIs declined for the first time in a year, dropping from 11,761 in December 2024 to 11,729 in January 2025, indicating growing concerns among foreign investors. As a consequence, the Indian rupee depreciated by 0.9 per cent month-on-month in February, highlighting the broader macro-financial implications of sustained capital outflows.

 

Foreign Portfolio Investors’ reduced exposure to Indian markets has been influenced by a mix of domestic and global developments. India’s economic growth has moderated, and corporate earnings—particularly among Nifty 50 companies— though quite robust, have remained relatively subdued over the past few quarters. Against the backdrop of relatively high market valuations, this has somewhat tempered investor appetite. The depreciation of the Indian rupee has also affected return expectations for foreign investors, as currency conversion becomes less favourable. Broader global concerns, including uncertainty around the U.S. economic outlook and ongoing trade tensions, have prompted a more cautious approach toward emerging markets like India. This shift in sentiment has contributed to notable FPI outflows, particularly from sectors such as IT, financial services, and consumer goods. FPI investments are critical to the health of financial markets, as they enhance liquidity, support asset prices, and contribute to currency stability by increasing the supply of foreign exchange. However, when FPIs withdraw, the demand for foreign currency rises, leading to depreciation of the local currency. These outflows can trigger market volatility, depress asset prices, and tighten liquidity, thereby posing broader challenges for macroeconomic management and policy response.

 

While the exit of FPIs from India may be attributed to geopolitical developments, broader macroeconomic trends, or a strategic rebalancing of global investment portfolios, the absence of  ease in investment norms also appears to have been a contributing factor.

 

In August 2023, SEBI came out with key regulatory interventions introducing additional disclosure requirements for FPIs. FPIs meeting the specified threshold were required to provide granular ownership details, including a full look-through disclosure up to the level of all natural persons holding any ownership, economic interest, or control. The circular did not impose any restrictions on investments but sought greater transparency from FPIs making large investments in a single group of companies. It required disclosure of the ultimate beneficial owner—the individual behind the investment. The requirements did not appear overly burdensome at first, with sufficient flexibility built into the framework, and initially impacted only a small number of FPIs. However, SEBI has additionally adopted the proposal to extend disclosure requirements to ODI subscribers and ODI issuing FPIs, through its Circular dated December 17, 2024. As a result, greater compliance and monitoring obligations have been placed on ODI issuing FPIs and their designated depository participants. These entities must now track investor thresholds, submit daily position reports, and monitor group entities that exercise significant control over ODIs, thereby strengthening oversight and transparency in the offshore derivative instruments space. Unlike direct FPIs, ODI subscribers were not previously required to disclose their ultimate beneficial ownership. In response, the market regulator has adopted a proactive stance, issuing a series of circulars aimed at addressing emerging risks, enhancing transparency, and strengthening compliance within the Indian securities market. These regulatory tightening coincides with a period of shifting FPI sentiment, as evidenced by recent capital outflows. In certain cases, the inability to furnish the requisite data—often due to its unavailability—has resulted in the forced exit of certain FPIs from the Indian market. This needs to be addressed immediately. In fact, the first set of deadlines for some of them is as early as May 2025, and the forced exit of clean FPIs from India can’t adequately be highlighted. Specifically, SEBI should do two things. One, delay the timelines for implemented the new norms to beyond 2026 (assuming the volatility of trade wars will subside by then). Two, use its exemptive authority to those FPIs who cannot find out the last human being in an FPI, which can be a real challenge if the investors number hundreds and many of them are listed companies or the like whose ultimate beneficial owner cannot be fairly obtained. This clearly is the worst time ever to get rid of clean money and make FPIs to divest.

 

SEBI and RBI play key roles in maintaining financial stability and investor confidence, to counteract FPI outflows. SEBI can review and ease investment norms where appropriate, while maintaining transparency. It can also engage with global investors to address concerns and clarify regulatory expectations. Investors seeking less restrictive regulatory environments may redirect their funds to other markets, affecting capital inflows into India. While SEBI’s broader objective of enhancing oversight and addressing regulatory arbitrage is well-intentioned, the practical implications of these measures warrant more thorough deliberation. Striking the right balance between regulatory rigour and market competitiveness will be crucial to sustaining India’s appeal as an investment destination in the global financial landscape. Similarly, RBI can intervene in the foreign exchange market to manage excessive currency volatility, ensure adequate liquidity in the banking system, and maintain orderly market conditions through monetary policy tools. On the other hand, the broader responsibility for sustaining foreign investor interest lies with the government, which must maintain macroeconomic stability, ensure policy predictability, and foster a favourable investment climate through structural reforms and sound fiscal management. A coordinated approach between regulators and the government is essential to effectively manage capital outflows and strengthen investor confidence. Key drivers of FPI inflows include strong economic fundamentals—such as robust GDP growth and low inflation—which signal long-term stability. Policy consistency, regulatory clarity, and simplified investment norms further support a positive investment environment, while attractive market valuations offer potential for higher returns. Together, these elements shall make India a compelling destination for foreign investors seeking both growth and security.

 

Disclosure: the firm has adviced FPIs with respect to the disclosures discussed.