Securities and Exchange Board of India (SEBI) on Market Manipulators

Syllabus: GS3/Economy

Context

• The Securities and Exchange Board of India (SEBI) will enhance surveillance and enforcement on market manipulators and cyber fraudsters through technology and use Artificial Intelligence (AI).

Securities and Exchange Board of India (SEBI)

• It is the regulatory authority for the securities and capital markets in India. 
• It was established in 1988 and given statutory powers through the SEBI Act of 1992.
• It falls under the administrative control of the Ministry of Finance.
• Objective:
  • Protect the interests of investors in securities.
  • Promote the development of the securities market.
  • Regulate the securities market in India.
• Composition: SEBI consists of:
  • A Chairperson (appointed by the Central Government).
  • Two members from the Ministry of Finance.
  • One member from the Reserve Bank of India (RBI).
  • Five other members (at least three whole-time members).

Powers of SEBI

• Quasi Judicial Powers: In cases of fraud and unethical practices in the securities market, SEBI India can pass judgements.
  • The said power of SEBI facilitates transparency, accountability and fairness in the securities market.
• Quasi Executive Powers: SEBI can examine the Book of Accounts and other vital documents to identify or gather evidence against violations. If it finds one violating the regulations, the regulatory body can impose rules, pass judgements and take legal actions against violators.
• Quasi Legislative Powers: To protect the interest of investors, it has been entrusted with the power to formulate pertinent rules and regulations.
  • Such rules tend to encompass listing obligations, insider trading regulations and essential disclosure requirements.

Challenges Faced by SEBI

• Rising Market Complexity: Growth of derivatives, algorithmic trading, high-frequency trading (HFT) and complex financial instruments.
  • Monitoring sophisticated market manipulation techniques has become more difficult.
• Insider Trading & Market Manipulation: Detecting insider trading through encrypted communications and offshore accounts is challenging.
• Regulation of Digital & Emerging Assets: There is an ambiguity over regulatory jurisdiction in areas like crypto-assets, fintech platforms, and digital investment advisory services.
• Overburdened Enforcement Mechanism: Large number of pending investigations and adjudication cases.
  • There is also delay in legal proceedings due to appeals in tribunals and courts.
• Balancing Regulation and Market Growth: Excessive regulation may discourage innovation and investment.
  • Under-regulation may expose investors to fraud and systemic risks.
• Technological & Cybersecurity Risks: Due to risk of cyberattacks on stock exchanges and intermediaries, there is a need for constant upgradation of surveillance systems.

Steps Taken by SEBI

• Strengthening Market Surveillance: Introduction of Integrated Market Surveillance System (IMSS).
  • Use of AI and data analytics to detect insider trading and price manipulation.
  • Tightened norms for algorithmic and high-frequency trading (HFT).
  • Stricter penalties and settlement mechanisms.
• Development of SEBI Check: It is a tool within the UPI interface that identifies registered intermediaries for investors before they make a payment.
  • The tool is expected to rein in fraudulent brokers or traders who promise unreal gains to investors and dupe them.
• Corporate Governance Reforms: Implementation of recommendations of the Uday Kotak Committee (2017). It recommended reforms in board composition, independence, related party transactions, and auditing.
• Regulation of Market Intermediaries: Strict registration and compliance requirements for brokers, mutual funds, credit rating agencies.
• Investor Protection Measures: Establishment of Investor Protection and Education Fund (IPEF).
  • SCORES (SEBI Complaints Redress System) for online grievance redressal.
• Cybersecurity & Technology Framework: Cybersecurity guidelines for stock exchanges and intermediaries.
  • Mandatory system audits and business continuity plans (BCP).

Source: TH