When Disclosure Meets Discipline: Recasting India’s Financial Regulatory Architecture

India’s financial regulatory design rests on a quiet but consequential dualism. The Securities and Exchange Board of India and the Reserve Bank of India embody two different conceptions of how markets should be governed and how stability should be preserved. SEBI is, at its core, a disclosure-driven regulator. Its faith lies in transparency, governance standards and informed investor choice as the principal mechanisms through which markets discipline excess and allocate capital efficiently. The RBI, by contrast, is a prudential regulator, entrusted with safeguarding the resilience of the financial system even when doing so requires intrusive supervision, binding constraints and pre-emptive restraint. This distinction explains why India’s regulatory apparatus will be increasingly tested by the evolution of modern finance.

SEBI’s regulatory philosophy has been shaped by the conviction that opacity, more than risk itself, is the original sin of markets. Its expanding disclosure regime, from public issuances to continuous listing obligations, from governance norms for intermediaries to detailed reporting requirements for funds and portfolio managers, reflects a belief that informed investors are the best custodians of market discipline. The steady refinement of capital issuance regulations, most recently amended in 2024, reinforces this orientation.

This emphasis on transparency has also acquired an operational dimension. Platforms such as SCORES, which now handle and resolve thousands of investor grievances, are expressions of a regulatory worldview that treats responsiveness and information symmetry as integral to market confidence. SEBI’s insistence on granular disclosures, whether in offer documents or ongoing reporting, is ultimately about preserving trust in price discovery itself.

In recent years, this disclosure-led approach has been extended into newer and less tangible domains. The creation of a framework to verify risk and return claims of investment products reflects an acknowledgement that information asymmetry today is increasingly narrative-driven rather than document-driven. Social media, finfluencers and algorithmic amplification have become powerful forces in shaping investor behaviour. When SEBI publicly acknowledged flagging tens of thousands of misleading investment posts, it was recognising that transparency without credibility is no transparency at all. In an environment where persuasion travels faster than verification, the regulator’s remit must extend beyond traditional intermediaries to the informational ecosystem itself.

The same philosophy underpins SEBI’s attempt to bring benchmark indices under closer governance oversight. Indices now anchor vast pools of passive capital and influence capital allocation across sectors and asset classes. Their construction methodologies, rebalancing rules and conflict management practices are no longer technical footnotes. By insisting on greater transparency and accountability from index providers, SEBI is responding to the reality that market infrastructure has itself become a source of systemic influence. Yet here too, the regulatory instrument remains disclosure rather than constraint. Illuminate the process, empower the investor, preserve confidence in the signal.

This worldview stands in deliberate contrast to the regulatory temperament of the Reserve Bank of India. The RBI’s mandate is not to perfect market information but to prevent instability from taking root and spreading. Capital adequacy norms, liquidity coverage requirements, leverage thresholds and exposure limits are not designed to inform investors. They are designed to protect the system from its own cyclical tendencies. Prudential regulation begins from a scepticism about market self-correction, especially in periods of exuberance.

Where SEBI relies on transparency to shape behaviour, the RBI relies on restraint. Its supervisory actions, ranging from statutory inspections and off-site surveillance to corrective measures and penalties, are intentionally intrusive. Restrictions imposed on weak institutions, limits on withdrawals to protect depositors, and repeated enforcement actions for governance and compliance failures are not market signals. They are stabilising interventions. Often, they are executed with limited public explanation, reflecting a prioritisation of systemic calm over informational completeness.

The RBI’s evolution towards scale-based regulation further illustrates this philosophy. By calibrating prudential norms to the size and complexity of banks and NBFCs, the central bank has acknowledged that systemic risk is rarely the product of isolated failure. It is the outcome of correlated behaviour, balance sheet similarity and feedback loops that amplify stress across institutions. Prudential regulation, in this sense, is a form of systemic insurance. It sacrifices some efficiency in order to buy resilience.

For much of India’s financial history, this dual architecture functioned effectively because banking and capital markets were largely distinct. That separation has eroded. Banks distribute market products and hold market-linked exposures. Mutual funds provide liquidity that often substitutes for deposits. NBFCs intermediate credit without access to central bank backstops. Algorithmic trading compresses reaction times and amplifies price movements into balance sheet stress. Systemic risk today is not confined to any single segment. It is an emergent property of the entire financial ecosystem.

Disclosure As Market Discipline
SEBI’s enforcement actions against insider trading, fraudulent schemes and market manipulation are aimed at preserving the integrity of price signals. Even high-profile prohibitions against sophisticated trading strategies reflect a conduct-oriented mandate rather than a stability-oriented one. The objective is fairness, not macroeconomic management. Yet the limits of disclosure become apparent precisely at moments of systemic stress. Transparency can reveal leverage, concentration and exuberance. It cannot prevent contagion when balance sheets unwind simultaneously. An informed investor may anticipate risk, but anticipation does not neutralise collapse.

Prudence As Systemic Insurance
This is where prudential regulation becomes indispensable. The RBI’s framework is built on the assumption that markets often overshoot and that incentives skew towards short-term gain. Its interventions therefore prioritise durability over dynamism. They are conservative by design, sometimes unpopular, but essential to preventing cascading failure. However, prudence confined to traditional institutions is no longer sufficient in a system where risk migrates freely across regulatory perimeters.

Private credit illustrates this challenge with particular clarity. Credit creation has historically sat squarely within the RBI’s jurisdiction, governed by capital buffers, provisioning norms and supervisory oversight. Yet a growing share of credit today is intermediated through alternative investment funds, especially Category II and III AIFs, which fall under SEBI’s regulatory ambit. These vehicles increasingly perform bank-like functions while remaining subject primarily to disclosure and investor-consent frameworks rather than prudential constraints. At present scale, this asymmetry appears manageable. But private credit is inherently pro-cyclical. As volumes grow and underwriting standards loosen, the absence of systemic guardrails could turn an innovative asset class into a transmission channel for stress. What is today framed as regulatory flexibility could, at scale, become regulatory fragility.

Markets That Defy Boundaries
Private credit is not an exception. Liquid and ultra-short duration mutual funds promise near-cash liquidity while investing in instruments that can seize under stress. Fintech-led distribution models blur the line between facilitation and intermediation. Derivatives markets generate leverage and interconnected exposures that are market-facing in form but systemic in consequence. In each case, disclosures may be comprehensive and investor consent formally secured, yet collective behaviour can amplify shocks in ways that no single regulator, acting alone, is equipped to pre-empt.

The deeper problem is conceptual. India’s regulatory architecture still assumes that risk resides neatly within institutional silos. Modern finance does not respect those boundaries. Capital flows across vehicles, platforms and balance sheets with ease, while regulatory mandates remain segmented by statute and legacy design. As new products scale and new intermediaries emerge, the space between disclosure-led oversight and prudential supervision is becoming increasingly crowded.

This is not an argument for centralisation, nor for diluting institutional mandates. It is an argument for synthesis. Transparency must increasingly be informed by systemic risk considerations. Prudential oversight must increasingly absorb market signals. Shared data architectures, joint risk assessments and explicit recognition of tipping points where market instruments acquire systemic character are no longer optional refinements. They are necessities.

What is ultimately at stake is not merely investor protection or bank solvency. It is the credibility of India’s financial system as a foundation for sustained growth and social wealth creation. If SEBI’s transparency and the RBI’s prudence continue to operate as parallel doctrines rather than convergent principles, the next crisis will exploit the seams between them. India’s regulatory architecture must evolve to match the complexity of its markets. The alternative is to learn, once again, at the point of stress rather than at the moment of design.

Time for FLSRC?
To an external observer, the coexistence of a disclosure-led regulator and a prudential guardian appears both logical and complementary. In practice, however, the interface between SEBI and the RBI is marked by friction, overlaps and, more importantly, blind spots. Nowhere is this more evident than in the treatment of systemic risk. SEBI does maintain the capacity to monitor market-wide indicators and interconnections, but its instinctive response remains informational rather than constraining. Transparency is strengthened, disclosures are refined, but binding system-wide limits rarely follow. The RBI, conversely, possesses the authority to impose prudential discipline on banks and regulated lenders, yet its reach attenuates sharply when risk migrates into capital market intermediaries or into the opaque interactions between funds, vehicles and balance sheets. Systemic risk, in effect, falls between stools.

What has changed is not the validity of either approach, but the environment in which they now operate. The boundaries that once separated banking from capital markets have eroded. Banks carry market exposures, mutual funds perform credit-like functions, and non-bank intermediaries intermediate risk at scale outside traditional prudential perimeters. Global episodes, whether sudden asset repricing or technology-driven trading shocks, repeatedly demonstrate that systemic stress is no longer sector-specific. It emerges from the interactions between institutions, markets and instruments, not from any one of them in isolation.

This reality places strain on a regulatory architecture designed for a simpler financial map. India’s framework must therefore evolve from a functional duality into a more cohesive systemic design. The repeated emphasis in Financial Stability Reports and international assessments on cross-sectoral risk detection, shared data platforms and integrated surveillance is not procedural housekeeping. It is an acknowledgement that systemic resilience cannot be achieved through segmented oversight.

It is in this context that the question of revisiting the spirit of the Financial Sector Legislative Reforms Commission arises, not as an institutional rearrangement exercise, but as a conceptual one. The objective need not be to collapse mandates or centralise authority. It must be to create a clearer locus of responsibility for systemic risk that transcends regulatory silos. Without such clarity, India risks confronting future crises with excellent disclosure, strong prudential rules and yet an incomplete grasp of how risk accumulates across the system. The cost of that gap will not be theoretical. It will be revealed, as it always is, at the point of stress rather than at the moment of reform.