Retail investors are walking the wire. Sebi should let VCs join the show.

Mint

17-07-2025

The Securities and Exchange Board of India (Sebi) recently found that Wall Street financial firm Jane Street Capital had manipulated the cash and forward markets, fleeced hapless Indian investors, and made millions of dollars.
For many, this would evoke images of The Wolf of Wall Street, howling Greed is Good, rebirth of the East India Company, and finance capital, rising, and shimmering, shapeless and threatening, from Lenin's tract on imperialism.
It might be more useful to interpret this as India's shoe-shine-boy-offering-stock-tips moment, and remove the restriction on venture capital (VC) funds raising money from the public.
The story goes that a stockbroker named Joseph, taking a break from hollering out the names of the stocks at the New York Stock Exchange's trading ring, walked around at Wall Street, and decided to let a lad offering a shine do his shoes, while he reflected on the good times America was going through in the late 1920s. Shining his shoes, the boy offered Joseph some hot tips for the market.
If shoeshine boys were offering stock tips, Joseph realized that the market had reached fever-pitch, and it was time to get out. He sold his stocks and shorted the market, that is, sold shares he did not have, borrowing the shares to sell, and, as markets fell, used a fraction of the proceeds to buy back the shares to replace the borrowed shares. He made $150 million as Black Monday and Black Tuesday rolled out in late October 1929.
Joseph used the money he made to give a head start to his brood of nine children. Two of them, John (Jack) and Robert (Bobby), subsequently made history. Joseph's surname was Kennedy. If Kennedy were alive today, and he were offered tips by a shoeshine boy on what stock options to buy, he would float a venture fund and list it on the market, regulators permitting.
Risk-on mode
Jane Street's precise shenanigans are incidental to the discussion here. What matters is the readiness of Indian participants in the futures and options (F&O) segment of the market to lose their shirts.
Sebi has found that 91% of F&O players lose their money, while the gainers are high-frequency traders like Jane Street. Those who burn their hands in the F&O market do not retreat in sorrow. They return with more funds and hand them over to the likes of Jane Street.
India accounts for approximately 60% of global stock futures and options volume. Its derivatives trade volume is around 350-400X the cash market volume—far exceeding the 5–15X seen in developed markets, according to a 2023 Axis Mutual Fund report.
This behaviour is in line with that of investors who pour their life's savings into systematic investment plans (SIPs) of mutual funds—all of whom chase the same set of viable stocks and push up their prices to unrealistic multiples of the underlying companies' earnings, weighted for growth prospects.
For Indian savers, mutual funds are what housing was to Chinese savers until recently. A stunted financial sector in China left real estate as the primary vehicle for individual savings, leading people to buy second and third homes.
The solution to the dearth of investment-worthy companies that are not overvalued is two-fold: channel a portion of savings to markets abroad and their companies, and increase the number of investible companies.
India does not save and invest enough at home to export savings without hurting its own growth. The preferable option is to create a new crop of profitable Indian companies. How do we do that? This is where venture capital comes in.
Insurmountable spirit
India has the talent to create new products and services. It offers vast scope for import substitution in the entire range of electronics, medical equipment, consumer goods, consumer durables, electric automobiles and components, energy transition products, telecom kits, and whatever else we gleefully import from China. A vast and totally new area is opening up in defence related goods and services.
India has the talent to produce this. Indians are constrained by collapsing bridges, roads that are unsure whether to self-identify as roads or impromptu swimming pools; thousands of laws that can innocuously be breached to send the violator to prison; deficient access to institutional capital; a tradition that deems risk-taking as illegitimate for all but a tiny group; a culture that discourages new knowledge by holding all knowledge to be finite and contained in the scriptures; a hierarchical social structure that makes the questioning of established authority sacrilege; an education system that privileges rote learning and grades, while shunning critical thinking; and an R&D outlay of just 0.64% of gross domestic product (GDP).
Yet, India is home to the world's third-largest herd of unicorns, startups valued at over a billion dollars. Indians do world-class R&D at proliferating global capability centres in the country to create value for multinationals. Indians abroad lead companies and start up big time.
The point is to make access to risk capital more prolific. Some of the funded projects would become stellar successes and make enough money to make up for those that fail. Ordinary investors normally shelter from such extreme risk and reward. That is why Sebi bars VC funds from raising capital from the public.
Indian investors' appetite for risk is something else. It makes a lot of sense to use that appetite to redirect their funds to create new, exciting companies, instead of inflating the prices of existing companies to unrealistic levels. Sebi should remove its restrictions on VC funds accepting money from the public. Let India be the first country to let shoeshine boys spread the word on hot venture stocks to buy.
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