Industry Practitioners Crucial in Policy Roles to Improve Decision-Making in India's Capital Markets

India’s capital markets need a stronger presence of industry practitioners in policy roles to reduce errors and improve decision-making, said Ananth Narayan G, former whole-time member of the Securities and Exchange Board of India (Sebi).In a conversation withBusiness Standard’sKhushboo Tiwari atBFSI Insight Summitin Mumbai on Friday, Narayan stressed the need for what he called “a good mix of practitioners and people with common sense” within Sebi and the broader financial ecosystem. “For the ecosystem to grow, we need practitioners as policymakers in Sebi. Sebi covers a vast area. These are very niche which requires depth,” he said.Challenge of interpreting feedbackNarayan outlined the two key mistakes regulators often face. “A type 1 error is when we let bad things happen, regulators hate it. The type 2 error is when, in our zeal to prevent type 1, we come out with a 10,000-page circular that makes life tough for practitioners,” he said.He added that Sebi consults widely through advisory committees and industry forums, but the challenge lies in interpreting that feedback. “Not every stakeholder is adequately represented, and there are natural conflicts of interest. You need expertise at the deciding level to minimise both type 1 and type 2 errors,” he said.Balance between policy design and market experienceNarayan argued that the quality of regulatory outcomes depends on this balance between policy design and market experience. “You have smart people at the policy and regulatory level, but you can’t become an expert just by being a smart person,” he said. “You also need checks and balances to prevent conflicts of interest. If we have a good ecosystem to manage it, that’s our best bet to minimise errors.”Also ReadBFSI Summit LIVE: Investor education on risk and asset allocation crucial, says Ananth NarayanBFSI summit: Top mutual fund CIOs advise caution amid global uncertaintyIndian market remains robust, though valuations not cheap: Industry leadersSebi chief stresses responsible tech use, stronger market resilienceReal technology bets will define India's market future: Shankar SharmaReferring to Sebi’s ongoing focus on the derivatives market, he said data had shown that retail investors are facing heavy losses. “Total losses by retail traders in futures and options in FY25 were ₹1 trillion,” he said. “The volume of trade, particularly on index expiry days, is simply not sustainable.”Narayan added that the regulator’s intent was to strike a balance without being overly interventionist. “Our intent is to manage three risks: retail losses, instability in the market, and the quality of the derivative curve, without playing god in the derivatives market,” he said.Caution on valuations and liquidityOn the issue of valuations and market liquidity, Narayan cautioned that exuberance in equities required vigilance. “In FY25, the net demand for equities through mutual funds was ₹6.25 trillion. Including other domestic institutional investors and individuals, the total demand was ₹8.8 trillion, equivalent to $100 billion. The net supply was ₹4.6 trillion. This gap is the highest we’ve ever seen,” he said, calling for greater investor education and awareness about risk and diversification.Citing foreign portfolio investor (FPI) reforms, Narayan said Sebi’s approach in recent years was a case of managing the balance well. “We could not create a regime so silly that FPIs would refuse to come,” he said.Narayan added that Sebi had worked to streamline processes such as T+1 settlement and ensure FPIs received tax certificates early to avoid delays. “On capital gains tax, we must be conscious, most large jurisdictions don’t apply it to FPIs. To stand out, we must be careful.”