Legal Safeguards for Retail Investors: Addressing Challenges in SIPs and IPOs

Indian financial sector has experienced remarkable changes in the past few years mainly due to the increased popularity of SIP investments and IPOs. These changes reflect a tendency of investors to adopt rational and sustainable investment practices on the stock market.

Although SIPs have received unprecedented attention for their predictability in returns, the IPO market has set historic high records with contributions. However, this growth comes with some problems, especially for the retail investor the problems include information asymmetry and market fluctuations.

Rise in Systematic Investment Plans (SIPs)

Systematic Investment Plans (SIPs) have emerged as the most popular and constituent method of mutual fund investment in India. SIP encourages disciplined investment as people invest preselected fixed amounts at certain intervals not affected by the fluctuations in the stock market. While December 2024 saw a record SIP contributions of ₹26,459 crore this has created history for mutual fund investors in the country. This means that there is a 50.2% year-on-year growth in the returns from SIPs, depicting the rising investor interest towards SIPs.

The following fundamental factors have played a role In determining the high growth rates of SIPs. Currently, there is a significant shift of investors towards long-term investment as opposed to short-term investment SIPs make this approach possible by allowing for constant and consistent contributions that, in the long run, produce large profits. Awareness and availability of information in education have helped investors to make good decisions.

Institutions such as the SEBI have come in and encouraged the use of SIP in mutual funds through policies that protect investors. It was suggested that the introduction of digital platforms and mobile applications has made it easier for a broader population to open SIPs and participate in mutual fund investments. The increase in SIP contributions shows another major development in investors’ behaviour in India. This tendency to focus on disciplined long-term investment moves for the future may be beneficial to the development of the Indian financial market.

Rise in Initial Public Offerings (IPOs)

The IPO market of India has grown incredibly well and is known to be one of the most rapidly growing IPO markets in the world today. The market expanded in 2024 with more than 90 companies collectively raising around ₹1.62 lakh crore, which is almost double that of ₹49,436 crore raised in 2023. Such strong growth can be explained by a stable economic foundation, a higher contribution from individuals, and a large amount of funds raised domestically. More importantly, Hyundai Motor India raised ₹27,870 crore through the IPO making it the largest IPO in India’s history.

Further, as per the Bombay Stock Exchange (BSE) predictions, this upward trend is expected to remain unexceptional in 2025. More than 90 companies have filed their draft red herring prospectuses and plan to raise approximately ₹1 lakh crore.

As stated by the BSE’s Chief Executive Officer, Sundararaman Ramamurthy, BSE intends to maintain the pace of the previous year in which 91 companies mobilized ₹1.6 lakh crore through IPOs. This constant increase in the IPO market indicates that both the companies and the investors believe in the future of India’s economy as it is a sign of a healthy capital market, which is expected to grow further.

Challenges Faced by Retail Investors

Due to some factors, retail investors in India have these challenges that may affect their investment. A common concern is information inequality, in which many of the new shareholders are unable or unwilling to obtain adequate and timely information to make good investment decisions. This gap often causes people to rely on uncredited sources or what can be referred to as 'finfluencers', causing poor investment decisions.

Market fluctuations only make it worse by increasing the challenges. It should be noted that the stock market is also exceptionally volatile, which means that investors might lose a lot of money, given they have no idea about what risks they are exposed to or they simply cannot read the market.

Indian School of Business report revealed that more than 20.2 lakh individual retail investors in India experience a zero compound rate of returns on their stock investments, which implies that many such participants do not have appropriate investment strategies. Also, such frauds are highly dangerous to retail investors which reveals a significant risk factor.

The Trafiksol ITS Technologies IPO case is a recent example. Here, the Indian company floated an SME-IPO of ₹44.9 crore to buy software from another shell company that had falsified its balance sheet and client list. SEBI stepped in and stopped the IPO that was going on in Trafiksol and arranged for a refund of the amount with investors. It brings out that there is a demand for better investor awareness campaigns, better and easier availability of information and major improvements in the legal framework to safeguard small investors in the Indian capital markets.

In September 2024, during the Bajaj Housing Finance IPO, many retail investors faced problems mainly relating to UPI. Such issues delay receiving the UPI mandates, which are crucial for making payments in IPO applications. Many well-known brokerage applications like Groww, Zerodha, and AngelOne experienced significant disruption, and investors did not appreciate that they drew their investments because they lost out on investment possibilities.

The scale of the problem was quite large: out of approximately 89 lakh applications, about 1.4 lakh were rejected, mainly because of UPI. These disqualifications were mostly due to failed mandates, either on grounds of investors rejecting issuance, or technical rejections.

The Trafiksol IPO Case: A Case Study

The Trafiksol ITS Technologies Ltd. IPO case highlights a need for increased diligence and supervision as a means for safeguarding small investors. Trafiksol started its operations in October 2024 and it issued an IPO and mobilized roughly ₹44.9 crore from the market. However, before the company floated its IPO, SEBI received complaints that the company planned to utilize a major portion of IPO funds for procuring software from a third-party vendor whose credibility was in doubt.

That proved to be a shadow company with fake operational entities and fabricated balance sheets, SEBI figured out during the investigation. Moreover, it was established that Trafiksol provided false documents about its capacity to conduct the business as presented in its offer documents. Based on these findings, SEBI acted quickly and suspended the listing of Trafiksol’s shares and ordered the company to repay the ₹44.9 crore that it got from the investors within one week. The Bombay Stock Exchange (BSE) was told to supervise the refund process to protect the investors’ side.

This case provides a look at the risks that small investors are exposed to regarding information disadvantages and scams in the capital markets. This makes it important for investors to exercise personal due diligence. In addition, regulation authorities (SEBI) should continue to exercise their power to ensure that markets’ integrity and investors’ well-being are preserved.

SEBI's Regulatory Framework

SEBI, the Apex regulatory body of India’s capital market has put in place an effective mechanism to protect the investor’s interest and promote transparency in securities markets. An important element of this framework is the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 which regulate public issues, rights issues, preferential issues as well as other securities. These regulations require specific disclosures from issuers as a way of promoting disclosure of information that would assist investors when making their decisions.

SEBI Due to the increased participation of SMEs in capital markets, SEBI has in the recent past, increased its rules for IPOs of SMEs. The new regulations also include the conditions as follows, To be eligible for an SME IPO an issuer has to have an operating profit of one crore in any two of the last three financial years.

At the same time, selling shareholders’ offers for sale (OFS) in SME IPOs have recently been limited to not more than 20% of the total issue size whilst no individual shareholder can sell more than half of its shareholding. These steps are meant to increase transparency, effective management, and the use of funds in the rapidly growing SME segment, improve investors’ confidence, and prevent financial fraud and unreliable companies from getting into the market.

Recommendations for Strengthening Securities Laws

To further protect retail investors, the following measures are recommended:

1) Enhanced Due Diligence: There is also a strong argument that investment banks and other intermediaries should undertake enhanced due diligence to exclude fraudsters from capital markets. This involves checking the accuracy of the financial statements, business models, and backgrounds of the promoters. Such a procedure of examination is quite effective in eliminating any organization that acts with an improper purpose and may deceive investors.

2) Technological Vigilance: Using higher technologies it is necessary to detect and protect against cyber frauds that threaten retail investors. Measures like real-time monitoring systems can monitor various activities relating to their securities, and artificially intelligent fraud detection methods will also swiftly assist detect these frauds.

3) Technological Vigilance: Using higher technologies it is necessary to detect and protect against cyber frauds that threaten retail investors. Measures like real-time monitoring systems and artificial intelligence-driven fraud tools would help detect suspicious activity on time to prevent the investors’’ interests from being violated.

Another effective method of preventing fraudulent activities by

4) Stricter Penalties: Enforcing penalties is to strongly avoid such actions by potential violators and ensure the market is protected. It is beneficial when regulatory bodies encourage strict measures including; major penalties like fines for non-compliance, and long-term imprisonment as the consequence of malpractice.

Conclusion

Investment in India is at a point of possible revolution through the growth in the SIP’s and the increase in IPO market. These trends can be seen as the developing investment culture as well as the positive outlook for the national economy. Anyway, there are problems such as low investor education, information, and high incidences of fraud that remain threats to retail investors.

Regulatory authorities like SEBI have reduced these issues through better disclosure standards and better codes and regulations. Specific and practical measures include enhanced due diligence processes, advanced technology controls to detect irregularities, and the imposition of more severe sanctions for violations. This way, India can build a more effective and risk-aware investment environment that would allow capital markets there to develop even further and give equal opportunities to the various stakeholders.

References

[1] Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, Available Here

[2] Order in the matter of Trafiksol ITS Technologies Ltd, Available Here

[3] SEBI cancels Trafiksol SME IPO, asks company to refund investors' money, Available Here