The Indian capital market continues to witness remarkable participation from retail investors, with the number of demat accounts nearing 20 crore.
Given this background of hyper-participation by domestic retail investors, the Securities and Exchange Board of India's recent approach has focused on balancing capital formation with systemic stability and investor protection. While India's capital markets have expanded significantly in scale and complexity, despite a robust regulatory framework, cases of misconduct have historically been detected only after substantial damage has occurred to investors.
To sustain investors' trust in the capital markets, there is a pressing need for structural reforms that enable early detection and proactive mitigation of financial fraud.
The recently released report by the Institute of Chartered Accountants of India (ICAI) in collaboration with SEBI, titled Prevention of Fraud in Capital Markets, serves as an inflexion point for stakeholders to better understand and address financial fraud in capital markets or companies listed in the market.
The study, based on a diverse sample of 50 SEBI-adjudicated cases of financial fraud, suggests that fraud rarely occurs in silos. Instead, it arises from a combination of factors and typologies, such as financial statement manipulation, fund diversions, corporate governance failures, fraudulent trade practices and price/market manipulations. The true value of the study lies in its implications for the future of the capital market ecosystem.
Reimagining capital market governance: Four imperatives for a more resilience capital market
From event-based enforcement to continuous risk monitoring
While the disclosure requirements mandated by SEBI and stock exchanges are exhaustive, there is a need to transition from event-based enforcement to a continuous risk monitoring model. This model must integrate data across filings, promoters'/connected parties' trading behaviour, delays in filing disclosures, governance events and announcements made by companies.
The continuous risk monitoring model can be further integrated with enhanced financial checks by including forensic accounting checks to strengthen the existing early warning signal (EWS) framework of SEBI and stock exchanges.
This has been similar to the approach outlined in the UK's Economic Crime and Corporate Transparency Act 2023 (ECCTA), which also introduced stricter corporate conduct obligations, particularly in fraud prevention. We are now witnessing a gradual shift across geographies, where monitoring fraud incidents and their impact proactively has become the status quo.
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Enhanced Board and Audit Committee oversight
The role of the Board and the audit committees cannot be overemphasised in the governance of a company. However, the study noted that the board and audit committees often failed to challenge management assertions and to exercise independent oversight of governance matters.
Boards and audit committees must work towards greater transparency to ensure capital protection. Greater emphasis should be placed on independent reviews and fraud risk assessments in areas vulnerable to fraud and misconduct, on monitoring the effectiveness of the whistleblower mechanism, and on continuous evaluation of controls, all of which are a must in today's dynamic business environment. Further, the Board and audit committees must invest in their members' continuous learning through training and workshops focused on corporate governance, fraud awareness, and related areas.
The investor must act as an active control participant
Another important aspect of the capital market's framework is the role of investors. They should implement certain modifications to their investment approach to prevent losses by adopting the red flag indicator approach rather than relying solely on price charts. Institutional investors may formalise a governance-risk monitoring framework alongside financial performance. Investors should consider using authentic information platforms such as SCORES and PaRRVA, as well as other initiatives by SEBI that make this information accessible.
Technology must be designed for prevention
The study underscores the inevitability of data‑driven surveillance in capital markets, while implicitly highlighting a critical limitation: manual oversight alone is no longer capable of keeping pace with the scale, complexity and speed of modern market activity. The next phase of fraud prevention, therefore, demands a decisive shift, in which continuous analytics, network analysis and anomaly detection are embedded as core market infrastructure rather than treated as experimental pilots.
Technology must be designed to flag behavioural drift and risk accumulation early, even in the absence of explicit rule violations, enabling intervention before misconduct crystallises into fraud. To make such early action defensible and credible, regulators and exchanges will need to invest in explainable AI frameworks that support transparency, judgement and accountability in supervisory decisions. This evolution represents a fundamental ecosystem shift from one in which preventive intelligence replaces reactive investigation as the cornerstone of capital‑market integrity.
Conclusion
The study shows that most frauds exhibited identifiable warning signs well before they were formally detected, underscoring the need for proactive, system-driven monitoring rather than reactive enforcement. Accordingly, the future lies in coordinated efforts through continuous risk monitoring and technology-based surveillance by regulators and exchanges, forward-looking audits, enhanced board and audit committee oversight and informed investor participation.
The Indian capital market must move to a new ecosystem by anticipating behavioural drifts and systemic vulnerabilities. A robust and well‑governed capital market, supported by effective mechanisms to prevent and detect fraud, is a strong indicator of a resilient economy, reflecting investor trust and transparency.
The article has been authored by Saurabh Khosla, partner at Deloitte India, and Puneet Grewal, director of Deloitte India.
Note: Puneet Grewal was a member of the ICAI-constituted Expert Group that carried out this research initiative
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