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

Sebi's Jane Street Revelation: A Shoeshine Boy's Tale for India's Future

The Securities and Exchange Board of India (Sebi)'s recent finding that Jane Street Capital manipulated Indian markets, raking in millions at the expense of unsuspecting investors, offers a potent parable. While the imagery of "The Wolf of Wall Street" readily springs to mind, a more insightful analogy lies in the classic "shoeshine boy" anecdote of the 1929 stock market crash.

Recall the story: a savvy stockbroker, taking a shine from a Wall Street shoeshine boy, realizes the market's fever pitch from the boy's unsolicited stock tips. This prompted the broker to act, ultimately profiting immensely from the subsequent market crash. This mirrors the current situation, highlighting the reckless behavior of Indian investors in the derivatives market.

India's High-Stakes Gamble:

• Sebi reports a staggering 91% loss rate among futures and options (F&O) participants, with high-frequency traders like Jane Street reaping the rewards.
• India's F&O trading volume dwarfs its cash market volume (350-400X), far exceeding developed market ratios (5-15X), according to a 2023 Axis Mutual Fund report.
• This mirrors the behavior seen in the mutual fund SIP market, where investors collectively inflate stock prices to unsustainable levels.

The Solution: Unlocking Venture Capital's Potential

The current situation stems from a two-pronged problem: a dearth of investment-worthy, undervalued companies, and insufficient domestic investment opportunities. While exporting savings is a possibility, stimulating domestic growth through the creation of new companies is more desirable.

India's Untapped Potential:

Despite infrastructural challenges, restrictive regulations, and a culturally ingrained aversion to risk, India boasts a thriving startup ecosystem – the world's third-largest unicorn herd. This potential is further underscored by the significant contributions of Indian talent in global R&D centers and multinational companies.

The Missing Piece: Increased Access to Risk Capital

The key is to increase access to risk capital. While ordinary investors are averse to the inherent volatility of venture capital, Indian investors demonstrate a significantly higher risk tolerance. This appetite should be channeled into funding new ventures, rather than fueling speculative bubbles in existing markets.

The Recommendation: Embrace the "Shoeshine Boy" Economy

Sebi should lift its restrictions on venture capital funds raising money from the public. This would harness the existing risk appetite of Indian investors, creating a vibrant ecosystem of innovation and growth. It would, in essence, allow India to lead the way in a new era of venture capital investing - an era where the "shoeshine boy" could indeed offer valuable insights into the next big investment.

For further analysis, see Mint Snapview.