8 ways in which Sebi is turning up the heat, without burning down the house

Sebi's Madhabi Buch said that the capital market regulator will not mandate mutual funds to stop new flows/rebalance portfolios of fund schemes or take any such steps without floating a consultation paper, but it is nudging trustees of mutual funds to take steps to protect investor interest.

Madhabi Puri Buch, Chairperson of the Securities and Exchange Board of India (Sebi), had a freewheeling discussion with women journalists recently to mark International Women’s Day.

She spoke on a range of topics, from market manipulation and regulatory innovation to collaborating with industry players and protecting investors’ trust in the securities market. Here are eight key takeaways.

Sebi has mandated a single, simple metric to capture diversity: the percentage of the total wage bill of an entity paid to women employees. This, the Chairperson said, is an ESG (environment social governance) parameter that captures diversity very well.

"This takes care of all the issues, whether there are enough women (in the organisation), whether they are (employed) at different levels of the organisation, whether they get equal pay. In one metric, you are able to capture whether an entity has a representation of women in its workforce across the board," she said.

This parameter is now part of the business responsibility and sustainability report (BRSR) Core, which is the Sebi mandated ESG disclosure framework.

Buch said that the regulator has seen “signs of manipulation in the SME (small and medium enterprises) segment."

Besides having the technology to identify patterns that suggest manipulation, the regulator has also received feedback from market participants on how such fraudulent activity can be identified and how it can be dealt with, she said.

Buch added that the regulator is trying to construct a case in a "robust manner" before taking action.

Incorporating technology deeper into its surveillance mechanisms is helping Sebi flag violations on a real-time basis. "We have moved from physical, sample-based inspections to 100 percent data-based inspections. The rigour of the inspections has gone up," said Buch.

She cited the example of its implementation in the mutual-fund industry. When the regulator first started the data-based, off-site supervision of mutual funds, it started with a little more than 40 algos that automated regulatory checks. Now, the algo count has either touched a hundred or is about to cross it, said Buch. "Every granular part of the regulation is converted into an algo and the logic of the algo is transparently shared with the industry," she said.

When the algo catches a violation, the industry is alerted so that such violations can be avoided in the future. This process is being rolled out across intermediaries, she said.

The regulator is planning to use artificial intelligence (AI) to scan IPO disclosures and paperwork.

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 regulator already has in-house talent to harness the technology and it can demonstrate to the exchanges how they can implement it as well, she said.

"Using this technology, the exchanges should be able to identify gaps at the time of filing. And this ... 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 carrying out automated supervision across the board.

Buch said that the capital market regulator will not mandate mutual funds to stop new flows/rebalance portfolios of fund schemes or take any such steps without floating a consultation paper. But it is nudging trustees of mutual funds to take steps to protect investor interest as there is a general feeling that there is froth in certain segments of the market.

“When they (the bubbles) burst, they impact investors adversely. That's not a good thing. So, what should the industry and each of the mutual funds do proactively to not keep fuelling the bubble? Now ... this is not something that should be mandated. What we have said is, this is an area of concern. Each mutual fund has trustees who are looking out for the interests of the investors. They should sit down and formulate a policy,” she said.

Buch said the regulator was okay with each fund deciding to have its own policy or for the industry to get together and draw up a common policy.

The directive is aimed at greater disclosure and transparency to empower investors to take more informed calls.

Sebi-registered entities cannot claim a performance metric unless it is validated by a third party agency. Buch said Sebi is looking at reviewing the performance validation agency proposal to make it easier to comply with, because there are a number of people advising (investors). She said that the regulator wants ease of doing business within its frameworks.

Even mutual fund houses, who, as of now, submit audited numbers to the regulator before claiming past performance, will need to approach this validation agency. She added that instead of a manual audit process, an automated process is being considered.

Asked about manipulation in the grey market that influences the issue price, Buch said that kerb-trading has to be looked at from a pre-listing and post-listing perspective.

The strategic intent of reducing the settlement time from T+6 to T+3 was to reduce the window available for grey market activity, she said.

“By cutting it short, you have started the trading in the regulated market sooner," she said.

Buch said that the regulator has adopted the attitude of trying to accommodate a massive need in the market, instead of trying to clamp down on it. "If investors want it, we think why not bring it into the fold of the regulated market (with proper risk management). This is the approach (of accommodation) we have taken with small and medium REITs and finding a new asset class between PMSs and MFs," she said.

Combating pre-IPO manipulation, which leads to overvaluation of IPOs, needs more deliberation, she said, adding that there are complications in doing that.

The move towards T+0 and instantaneous settlement is to ensure liquidity stays within markets here, said Buch. Crypto offers three things to customers: anonymity, tokenisation, and instantaneous settlement, she pointed out. If the well-regulated market does not offer tokenisation and instantaneous settlement to individuals, over the medium term investors are likely to move to cryptocurrencies, said Buch. If the liquidity moves out of the market it is a terrible outcome for mutual funds, FPIs, and retail investors, she noted.

If Sebi does not move the entire ecosystem to optional T+0 or optional instantaneous settlement, "two years later you will have to explain to your shareholders why you lost market share to crypto", she said.