4 things SEBI is working on to stop price manipulation in SME segment

Sebi's Madhabi Buch was talking about the additional disclosures that will be in place from March 15.

The market regulator is working on various ways to stop stock-price manipulation in the small and medium enterprises (SME) segment, SEBI chairperson Madhabi Puri Buch has said.

The regulator has noticed manipulation in SME segment — during the initial public offers (IPOs) as well as trading— and has introduced various measures to curb it, the Securities and Exchange Board of India chief said on March 11. She was speaking at an event organised by the Association of Mutual Funds in India (AMFI) to felicitate woman fund managers.

Here are the four steps the SEBI is taking to check price manipulation in SME space:

1) Asking for more disclosures regarding the risk factors

Buch said that investors must be made aware that the SME segment is different from the mainboard in terms of regulatory compliances and disclosures and, therefore, its risk profile is different.

Buch said, "It's important to underline that in the disclosures made to the investors."

The proposal is still in the works. "It is still on the kitchen table (being prepared) and has not gone into the oven. When a consultation paper is issued, it means that a proposal has entered the oven. Right now, we are still working with advisers (to understand what data is relevant and so on)," Buch said.

Also read: Not appropriate to allow bubble to keep building because bubbles will burst: SEBI chairperson

2) Building a 'robust' case before taking action

While SEBI has received strong indications of manipulation — through its technology and inputs from market participants — the market regulator is working to build a "robust" case before taking action.

"We are working to evidence the signs (of price manipulation), both at the IPO level and at the trading level," Buch said. "We have the technology to do it and therefore we can see the patterns (of fraudulent activity) and, fortunately, the market has also given us feedback and advice on how to identify such instances and how to deal with them."

Using these inputs, the regulator is attempting to build a watertight case.

Buch said the regulator is grateful to the industry for behaving in a mature manner in providing assistance to right this.

"We are all aligned on the main objective because, these few isolated cases (of price manipulation), can diminish (investors') trust in the whole ecosystem," she said.

3) Providing quality information to investors   

The regulator is trying to improve the quality of inputs given to the investor in the secondary market.

When an investor or trader enters a stock code to buy, the brokerage platform issues a message that the stock has been placed under a surveillance measure. It works as a warning, giving investor pause to consider going ahead with the transaction.

There is "a lot of opportunity to enhance the content and quality of this input", Buch said.

"This is not generic disclosure that an investor has look up somewhere. It is to be given at this point of time (when the transaction is about to be made) and they are looking to buy a particular scrip, then they should get relevant inputs that are completely objective and that carry no opinion," she said. The regulator is thinking of providing qualitatively better input to investors/traders in the secondary market.

4) Using AI

The regulator is using artificial intelligence (AI) to check if the paperwork submitted for an IPOs is adequate.

For SME IPO filings, the regulator does a manual check to see if the exchanges have ensured that adequate disclosures have been made, Buch said. "The real impact will come when we are able to use AI to do this," she said.

"The reason we can do this simply and quickly is that these are based on public documents. It is a little more challenging to deploy AI to check confidential data and documents," Buch said.

Also read: Pockets of irrational exuberance in small and midcaps, says SEBI chief Madhabi Puri Buch

The regulator already has in-house talent to harness the technology and that it can demonstrate to the exchanges how they can implement this as well.

"Using this technology, the exchanges should be able to identify the gaps at the time of filing. And this, of improving the quality of examination of documents, should happen within months and certainly not take years," said Buch.

She said that the regulator is already doing automated supervision across the board. Whenever an analysis needs to be done in a structured format, the regulator writes an algo to perform that task and implements it, she said. Buch said that this process is already being done to check on various market intermediaries.