Sebi’s latest reforms will help India’s capital markets but only up to a point
The Securities and Exchange Board of India (Sebi) has introduced regulatory reforms to enhance market efficiency and boost startup participation in the primary market amid concerns of geopolitical instability.
The capital markets regulator Securities and Exchange Board of India (Sebi) has announced a slew of regulatory reforms that are designed to clear roadblocks impeding market efficiency, eliminate disincentives hindering investor access to markets and encourage greater startup participation in the primary market.
Sebi is clearly acting on the knowledge that geopolitical turmoil might unsettle stock indices and the flow of fresh equity. Available data for the past few months shows that global portfolio investors have been acting antsy: they have withdrawn large sums from India’s equity market lately. Sebi has eased pathways for private equity vehicles and venture capital (PE-VC) funds to unlock investments in India, particularly in startups, which should attract more long-term capital.
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There has been some chatter about how Sebi’s rules favour foreign funds, including the PE-VC universe; as if to counter these unsubstantiated conspiracy theories, Sebi has ensured that even startup promoters gain from regulatory reforms and are better motivated to take their businesses public. However, while these measures are likely to work for issuers of paper, we should assess their success likelihood from a counterparty point-of-view as well.
The issue is moot once it’s slightly reframed: who will buy the paper offloaded by startups? The initial public offering (IPO) market in India has been robust over the past 2-3 years. During 2024-25, for example, about 80 IPOs raised some ₹1.6 trillion from the primary market. However, the rush to cash in on a bullish secondary market also saw many fly-by-night operators coming to raise capital from unsuspecting investors.
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There was one factor that greased these uneven wheels: excess liquidity in global markets that found its way into overpriced shares. With that money having grown scarce and IPO enthusiasm having dimmed in 2025, it’s unclear if the primary market can get back to form.
Domestically, the Reserve Bank of India (RBI) recently cut rates and plans to leave banks a larger fraction of deposits to lend out, but it also shifted its stance to ‘neutral’ from ‘accommodative.’ The stock market has had some visible support from domestic institutional investors, but again, there are early signs that this may change with retail inflows into mutual funds reportedly slowing.
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This raises a larger question of retail savings in India’s economy and an elephant in the room: financial repression through low interest rates on deposits.
RBI’s latest repo rate cut of half a percentage point has made banks slash their fixed deposit and savings account rates. The country’s largest lender, State Bank of India, now offers only 2.5% on its savings accounts. After accounting for inflation and tax liability, this translates into negative earnings for depositors. Even for fixed deposits or government bonds, the current rates offer meagre or negative annual returns.
Low interest rates undoubtedly work for borrowers, but this must not be at the cost of household savings. Data from RBI shows a falling share of bank deposits in household financial assets.
Prudent investment theory advocates a mix of asset classes in a portfolio, with their ratio going by one’s life-cycle stage. A single risky asset class, like shares or mutual fund units, should not dominate anyone’s holdings. Policy frameworks that drive such a configuration could embed future risks in the economy’s progress. Policymakers should pay more attention to this.
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