How SEBI Under Buch & The Government Under Sitharaman Killed the Market

India’s stock market, once a booming hub for investors and traders, is now struggling under the weight of excessive regulations, over-taxation, and anti-investor policies. The SEBI under Madhabi Buch and the Finance Ministry under Nirmala Sitharaman have introduced multiple rules that have:

• Destroyed liquidity in small- & mid-cap stocks
• Increased taxation burden on traders & long-term investors
• Forced capital outflows to global markets like SGX, Nasdaq, and Dubai
• Made investing & trading in India less attractive

While not all SEBI regulations and government tax policies had a purely negative impact, the cumulative effect of excessive restrictions, high taxation, and regulatory overreach primarily contributed to the recent slowdown in market participation, liquidity, and investor sentiment.

Some rules were aimed at curbing manipulation and ensuring stability, but in practice, they ended up discouraging genuine investors, traders, and institutions from actively participating in the Indian markets.

The challenge now is to strike a balance ensuring fair regulations without stifling market growth or pushing investors to foreign alternatives. With the right adjustments, India’s stock market can regain its competitive edge.

Here’s how their decisions have damaged Indian stock markets instead of helping them.

1. SEBI’s Overregulation – Killing Market Liquidity & Growth

🔴 Small & Mid-Cap Stocks Crashed Due to ASM/GSM Rules

📌 Case:

• SEBI’s Additional Surveillance Measures (ASM) & Graded Surveillance Mechanism (GSM) put restrictions on many small- and mid-cap stocks.
• Many Stocks saw massive 20-50% sell-offs after being flagged.

📉 Impact:

• Retail investors panicked & sold stocks at a loss due to SEBI’s intervention.
• Many genuine businesses suffered unnecessary restrictions, reducing investment potential.

⚠️ Lesson: Instead of targeting real manipulation, SEBI’s measures punished retail investors.

🔴 Margin Rule Changes – Killing Intraday Trading & Liquidity

📌 Case:

• SEBI forced upfront margin requirements, making intraday trading more expensive.
• This led to a 20-30% drop in daily trading volumes on NSE.

📉 Impact:

• Brokers lost clients, as traders quit due to higher capital requirements.
• Market liquidity suffered, increasing volatility.
• Traders moved to offshore markets like SGX Nifty for better flexibility.

⚠️ Lesson: Instead of managing risk, SEBI killed trading activity with unnecessary margin rules.

🔴 SEBI’s Ban on Derivatives in Certain Stocks – Hurting Hedging Markets

📌 Case:

• SEBI restricted derivatives trading in low-liquidity stocks to curb speculation.

📉 Impact:

• Trading volumes collapsed, instead of stabilizing.
• Hedgers struggled due to fewer instruments available.
• SGX Nifty gained more volume, while India’s market lost competitiveness.

⚠️ Lesson: Instead of reducing speculation, SEBI hurt genuine hedging activity and liquidity.

🔴 Overregulation of Mutual Funds – Fund Managers Lost Flexibility

📌 Case:

• SEBI forced mutual funds into strict categories (Large-Cap, Mid-Cap, Small-Cap), limiting how funds allocate money.

📉 Impact:

• Fund managers couldn’t rebalance freely, leading to lower returns.
• Investors moved to index funds & direct stocks, avoiding mutual funds.

⚠️ Lesson: SEBI restricted flexibility instead of improving transparency.

🔴 SEBI’s Crackdown on Financial Influencers (‘Finfluencers’) – Hurting Market Awareness

📌 Case:

• SEBI is trying to regulate or ban financial influencers who educate retail investors about markets, investments, and trading.
• Strict compliance rules and penalties are being considered, making it harder for genuine finfluencers to operate.

📉 Impact:

1. Retail investors lose free financial education, leading to lower awareness.
2. Genuine finfluencers, who promote responsible investing, are punished, while scam artists continue in unregulated spaces.
3. Investors may turn to unverified, anonymous sources, increasing fraud risks.
4. Financial literacy campaigns suffer, making stock market participation drop.

⚠️ Lesson: Instead of blocking all finfluencers, SEBI should differentiate between genuine educators and misleading promoters, allowing a structured, regulated environment.

 

🔴 SEBI’s Ban on ‘Refer & Earn’ – Stopping Retail Investor Growth

📌 Case:

• SEBI banned ‘Refer & Earn’ programs, stopping brokers from offering rewards for referring new investors.

🔽 Impact:

1. Drop in New Retail Investors – Many first-time investors joined because of referrals. The ban reduced new participation.
2. Loss of Financial Literacy Growth – ‘Refer & Earn’ encouraged more people to learn about markets.
3. Smaller Brokers Suffered – New brokers relied on referrals to compete with big players like Zerodha & ICICI Direct.
4. Crypto & Forex Platforms Benefited – Many traders shifted to crypto & forex, where referral programs still exist.

🛑 Lesson: Instead of banning ‘Refer & Earn,’ SEBI should have regulated it better while allowing healthy market expansion.

 

2. High Taxes Under Sitharaman – Driving Investors & Traders Away

Impact of STT on Derivatives Trading – Shift to SGX Nifty

📌 Case:

• India charges STT on both buying & selling of derivatives, making trading expensive.
• SGX Nifty (Singapore Exchange) offers Nifty futures trading without STT, attracting traders.

📉 Impact:

• SGX Nifty saw higher volumes than NSE’s Nifty Futures for years.
• Many FIIs & institutional traders preferred SGX over NSE for hedging.
• SEBI was forced to negotiate with Singapore Exchange (SGX) to bring trading back to India.

⚠️ Lesson:

• High STT makes India uncompetitive, pushing trading volumes offshore.
• Derivatives markets need deep liquidity, but STT discourages active traders.

STCG Tax Makes Indian Stocks Less Attractive Than Global Markets

📌 Case:

• Indian stocks held for less than 1 year are taxed at 15% (STCG).
• In the US, Singapore, and Dubai, there’s no short-term capital gains tax on equities.

📉 Impact:

• HNIs & retail investors prefer investing in US stocks .
• Many Indians trade options in US markets (like Nasdaq, S&P 500 futures) instead of Nifty due to tax advantages.
• Lower market participation in India hurts domestic liquidity.

⚠️ Lesson:

• High STCG discourages active investing & portfolio adjustments.
• India must reduce STCG tax to boost local market participation.

 

LTCG Tax on Equity – Hurting Long-Term Investors & SIP Holders

📌 Case:

• Before 2018, LTCG on stocks was tax-free.
• In 2018, LTCG was reintroduced at 10% on gains above ₹1 lakh, without indexation benefits.

📉 Impact:

• SIP (Systematic Investment Plan) investors now pay tax on long-term equity gains, reducing returns.
• Investors shift to tax-free alternatives like ULIPs & Sovereign Gold Bonds.
• Startups face lower valuation multiples, as investors demand higher post-tax returns.

🔹 Example:

• A ₹10 lakh investment in a mutual fund for 5 years, with a ₹5 lakh profit, loses ₹40,000 in LTCG tax.
• This discourages long-term wealth creation in equities.

⚠️ Lesson:

• LTCG tax should be reduced or removed for long-term investors to promote wealth creation.

 

Dividend Taxation – Making Dividend Stocks Less Attractive

📌 Case:

• Before 2020, dividends were taxed at 15% DDT (Dividend Distribution Tax) at the company level.
• Now, dividends are taxed at the investor’s income tax slab rate (up to 30%), plus 10% TDS.

📉 Impact:

• Retail investors lose more in taxes, as dividend income is now taxed at higher rates.
• Many companies prefer buybacks over dividends, as buybacks have a lower tax burden.
• Dividend-heavy sectors (like FMCG, IT, PSU stocks) see lower investor interest.

🔹 Example:

• If an investor in the 30% tax bracket gets ₹1 lakh in dividends, they lose ₹30,000 in taxes.
• The same investor would pay much lower tax on capital gains if the company had done a buyback instead.

⚠️ Lesson:

• Dividend taxation should be simplified to avoid double taxation.
• TDS on dividends should be removed to make dividend investing more attractive.

 

Impact of High Trading Taxes on Retail Participation – Fall in Trading Volumes

📌 Case:

• SEBI increased STT on options trading from ₹5,000 per crore to ₹12,500 per crore (150% increase) in 2023.
• This made trading more expensive for retail & intraday traders.

📉 Impact:

• Options trading volume fell initially, as traders shifted to foreign markets.
• Retail participation declined, as smaller traders found it hard to cover higher costs.
• Many traders moved to crypto & forex, where STT doesn’t apply.

🔹 Example:

• A trader doing ₹1 crore worth of options trades now pays ₹12,500 in STT, making it harder to be profitable.

⚠️ Lesson:

• High STT is a hidden tax that reduces liquidity in stock markets.
• India should reduce STT on F&O trades to bring back trading volumes.

 

The Result: India’s Stock Market Is Losing Its Edge

📉 How SEBI & Government Policies Have Hurt Markets:
❌ Small & mid-cap investors are trapped under unnecessary surveillance rules.
❌ Intraday & derivatives traders are quitting due to high STT & margin restrictions.
❌ Long-term investors face high LTCG tax, reducing SIP appeal.
❌ Dividend investors suffer double taxation, reducing passive income potential.
❌ Foreign investors find India’s tax regime unattractive, causing capital outflows.

🚨 Meanwhile, countries like the US, Singapore, and Dubai offer better market conditions:
✅ No STT in US, Singapore, or Dubai → Lower cost of trading.
✅ Lower or zero STCG/LTCG tax → More investor participation.
✅ Better derivatives market flexibility → More hedging opportunities.

Conclusion: A New Era Under Tuhin Kant Pandey?

With Tuhin Kant Pandey as SEBI Chief, there is hope for positive change in India’s stock market regulations. The excessive restrictions, over-taxation, and anti-investor policies under the previous leadership have driven liquidity away and made Indian markets less competitive globally.

However, this can still be fixed. If SEBI under Pandey:
✅ Eases surveillance restrictions on small & mid-cap stocks,
✅ Reduces trading taxes (STT, STCG, LTCG) to attract investors,
✅ Revisits margin & derivatives trading rules to improve liquidity,
✅ Encourages financial literacy instead of restricting finfluencers,
✅ Brings back healthy investor referral programs,

then India’s stock market can regain its strength and once again become an attractive hub for investors, traders, and businesses. The new SEBI leadership has a crucial opportunity to correct past mistakes and bring back confidence in Indian markets.

The question is: Will Tuhin Kant Pandey take bold steps to revive the market, or will SEBI continue down the same restrictive path? The future of India’s stock market depends on it. 🚀

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Disclaimer:

This article is for informational purposes only and does not constitute financial, investment, or legal advice. The views expressed are based on publicly available information and market observations. Readers are encouraged to conduct their own research and consult with a qualified financial advisor before making any investment decisions.

The article is not intended to defame any individual or institution, including SEBI or the Ministry of Finance. Its purpose is to highlight market trends, investor concerns, and potential areas for policy improvement.

Stock market investments are subject to market risks. Please trade and invest responsibly.