SEBI moving towards granular risk-based regulation using AI, says Madhabi Puri Buch

Madhabi Puri Buch

Market regulator Securities and Exchange Board of India (SEBI) is moving towards granular risk-based regulation for entities such as mutual funds, exchanges, brokers and others, using artificial intelligence (AI).

"In the past, it was one-size-fits-all, one regulation for everybody. Now, we are saying that if different segments carry different risks, then regulations should also be designed accordingly," SEBI chairperson Madhabi Puri Buch said at the Global Fintech Fest 2023.

For instance, SEBI is planning to introduce Mutual Fund Lite regulations for passive funds, wherein investment decisions are not discretionary, but tied to changes in the underlying benchmark index.

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"The entire rulebook that governs mutual funds will be down to 10 percent because passive funds do not need that kind of regulation," Buch said.

"Artificial intelligence will help us differentiate between the good apple and bad apple, at a much more granular level. AI will help us form regulations that are almost custom-fit for the entity. If an entity has managed risk well, the regulations that will apply to it will be of a lower level," she explained.

Disclosure or information overload

Over the years, SEBI has focused on disclosure-based regulation. Listed companies, stock exchanges, brokers, mutual funds, portfolio management services, among others have to disclose several data points for the market regulator to formulate regulations.

"Many a times, we at SEBI have found ourselves questioning that have disclosures reached a point of information overload. But now as AI is applied on them, it can become a tool for giving very high quality input and advice to citizens," Buch said.

She cited an instance wherein a long gestation, seven-year lock-in wealth product was sold to a 90-year old man. Such cases of mis-selling is what the SEBI wants to prevent with the help of data and AI.

"Data is public good. Data is infrastructure. Every piece of data mandated to be disclosed should be available free of cost, conveniently download-able and with archives," she said.