A Regulator Must Protect Interests Of All Investors Small And Big, Not Just The Largest Ones

India’s capital markets were never meant to be a private club for institutions. They grew because ordinary Indians trusted them to be open, transparent, and fair. That trust is now under strain. SEBI is reshaping the rules in ways that make life smoother for large players, while increasingly leaving retail traders and small investors to absorb the shocks. The danger is not that institutions are being given greater flexibility; it is that the flexibility is coming at the cost of the openness that allowed smaller participants to compete and participate meaningfully.

Closing Auction Session Under Scrutiny

The latest flashpoint is the Closing Auction Session, introduced on August 3. For years, the closing price reflected the volume-weighted average of the final half hour of continuous trading. It was not perfect, yet it kept everyone in the same arena. CAS replaced that with a dedicated 20-minute auction after continuous trading stops at 3:15 pm for stocks that have derivatives. The official close is now set by matching orders in that narrow window. SEBI presented the change as modernisation, better price discovery, and alignment with global exchanges. What it delivered in its first month was something else entirely.

Equity derivatives turnover on the NSE collapsed in August to its lowest level since November 2023. Bank Nifty futures volumes also fell steeply. Equity options contracts dropped roughly 30 per cent month on month. Traders responded the only way they could—they closed positions early, cut expiry exposure, and bought more hedges. A mechanism sold as improving price discovery has instead made many participants less willing to stay in the market at all. For smaller traders, who cannot absorb large, unexpected movements as easily as institutions, such uncertainty can quickly become a reason to reduce participation.

September 3 showed how dangerous the new arrangement could be. On Sensex derivatives expiry, the indicative closing level swung wildly. Some put option premiums exploded 400 to 500 per cent in minutes. One contract’s price moved with a violence that left writers exposed and scrambling. SEBI’s response was to announce a review of the derivatives settlement methodology. The review is necessary, but continuing with CAS unchanged while that review proceeds leaves retail participants carrying the consequences of an experiment they did not ask for. Why keep a mechanism that is already producing unintended damage when its underlying design is under question? The burden of uncertainty should not routinely fall on those least equipped to manage it.

Block Deal Framework Raises Concerns

The problem does not end with CAS. SEBI’s recent rewrite of the block deal framework compounds the tilt. The price band has widened from 1 per cent to 3 per cent, while the minimum deal size has jumped from Rs 10 crore to Rs 25 crore. Large investors need room to move size without excessive market impact. That is understood. Yet, the wider window makes it easier for institutions to transact with one another away from the continuous market. The leakage that once forced big orders into contact with smaller ones is being steadily reduced. India historically rejected a pure upstairs market; it is now constructing one by degrees.

Put the two changes together and the picture becomes difficult to ignore. Institutional flow that once interacted with the broader market can now concentrate on the closing auction or execute in the expanded block window, while retail participants remain largely in the continuous session, which risks growing thinner. Liquidity that used to be shared is being ring-fenced. Price discovery that used to be collective is being segmented. The very features that made India’s market distinctive—high transparency, visible order books, and retail participation on something approaching equal footing—are being diluted. What looks like greater efficiency from the perspective of a large institution can, therefore, mean reduced access and greater uncertainty for the smaller participant.

Risk And Activity Could Shift

Where does the displaced activity go? Equity derivatives have become less predictable, while commodity derivatives have shown relative strength. Correlation is not proof of causation, yet a regulator serious about systemic health would examine whether its own rules are simply pushing risk and volume elsewhere rather than solving the underlying problem and whether activity is being improved or merely displaced.

Retail traders on social media have been blunt about the consequences. They may not write consultation papers, but they live the spreads, the volatility, and the sudden gaps. SEBI has treated much of that criticism as noise. That is a mistake. Markets are not laboratory models; they are systems of human behaviour. And when behaviour changes sharply after a rule change, the rule deserves scrutiny rather than defence. Dismissing the concerns of thousands of participants also risks widening the distance between the regulator and the market it is meant to oversee.

Regulator’s Mandate And Market Trust

SEBI’s mandate is investor protection and market development for all participants, not just convenience for the largest ones. Passive funds and foreign institutions will always press for lower impact and cleaner execution. That is their commercial interest. The regulator’s interest is supposed to be broader. When institutional flexibility expands while retail participants face greater complexity and uncertainty, the balance begins to look less like market development and more like a shift in whose interests the market is being designed around.

India’s markets became large because millions of ordinary citizens entered them believing the rules applied evenly. That belief is not a soft asset; it is the foundation. SEBI is in danger of treating sophistication for the biggest players as progress, while the people who built the market’s depth are asked to adapt or leave. The question that must be answered is no longer academic: is the regulator building a market that works for everyone or one that works best for those who already hold the most power?

The writer is a retired IRS officer and Ex-Chief of Surveillance at SEBI. Advisor to corporates, market participants and tech entrepreneurs.

Published on: Wednesday, September 09, 2026, 09:23 PM IST