By Trisha Shreyashi
Madhabi Puri Buch, the first female chairperson of the Securities & Exchange Board of India addressed the 49th Foundation Day Lecture at Indian Institute of Management, Bangalore as the Chief Guest of the occasion. She emphatically spoke to the role that data and technology play in the regulation, surveillance, reporting, prosecution and policy-making for the capital markets in India.
“Everything that technology is doing today is basically reengineering processes to manage those three important aspects – Risk reduction, Cost Reduction & Ease of doing business“Madhabi Puri Buch, SEBI Chairperson
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“The first non-IAS to be at the helm of the regulatory body shared her experience of over two decades in the corporate sector and underlined that there are two things that were always a constraint in any plans going forward. One was the lack of data which held back decision-making. Second is a huge enabler i.e. tech, she said.
Data & Tech in Prosecution
She iterated that one of the things that SEBI worries about a lot is whether there is any misconduct happening in the market like front running, insider trading, etc. Earlier, the regulator had to depend on black boxes and imported software that wasn’t working for the Indian ecosystem. She emphasized the time and resource limitations of a government organization in lateral hiring or contracting with experts to upgrade itself technically. So, SEBI’s in-house team put together algorithms to track suspicious trading patterns and detect any misconduct happening in the market.
Explaining the usage of data in surveillance and adjudication, she shared that SEBI embedded a QR Code in one of its orders. The QR code embedded the video clip depicting the delta trading positions of an individual across various scrips over time. The regulator noted from the clip that the delta position of the individual in question shot up just before quarterly results, as opposed to his trading pattern at other times which was relatively systematic. A cursory glance at the film makes it very easy to infer insider trading, Buch said. That is the power of data and more importantly the power of visualization, especially when you have to convince other people.
The regulator has similar algorithms for front running that enable it to detect whether the misconduct is happening at the broker’s end or the mutual fund’s end, Buch added. SEBI has been able to harness its powers to identify misconduct in the market with the aid and help of data analytics and technological upgradation, she underscored. However, we have had our setbacks because the regulations have not kept pace with the technology, she said in her address hopefully anticipating to catch up in a few months.
“The objective of algos is to prevent the crook, not only to catch them“Madhabi Puri Buch, Chairperson, SEBI
On surveillance, reporting & inspection
Apart from looking at data for surveillance, SEBI relies a lot on data in terms of information in the filings for various entities so as to alleviate information symmetry, which is the fundamental premise of an efficient market. Buch shared her experience of facing resistance in amending the mode of reporting data and said that eXtensible Business Reporting Language (XBRL) has revolutionized the filing system by infusing the power of data. It standardizes the mode of filing and makes it easy for analysts and media to pick it up.
“By a stroke of a pen saying henceforth all filings will be in XBRL, you change the way data is presented to the public and the way in which the corporate sector is expected to be responsible in terms of their reporting…100% audit of every single regulation, every single data point“SEBI Chairperson
Buch emphasized the usage of technology for inspection and auditing. Earlier, it was a year-long procedure involving a team of auditors, sample checks, manual assessments, and issues between auditor and auditee on the interpretation of the law and by the time the report reaches the desk of the regulator, it is too late to act on any wrongdoing that may have occurred.
Buch explained it in the context of the mutual fund industry where the funds were informed of the algorithms that would survey their movements. The data is collected daily and is run every three months. The funds receive an excel sheet entailing multiple tabs relating to various regulations. The excel sheet shall specify against each transaction recorded date-wise, whether there was any violation and if so, the penalty prescribed for such violation.
Reiterating the efficiency of algorithms, Buch said that today the way the inspections are happening in mutual funds, it could be done on a daily basis but the regulator chooses to do it on a quarterly basis. This gives time to the industry to find its own mistakes and fix them, she added. However, the detection algorithm as it is presently falls short of detecting unstructured misconduct like misselling of schemes.
“The regulator is engaged with devising algorithms to detect the violation of spirit of law, not only letter of law“Madhabi Puri Buch, Chairperson, SEBI
Adoption of technology by corporates
Buch underlined the need for corporations to adopt the technology. One instance she explicated was the pledge-repledge mechanism where the trader has to post margin with the exchange. Earlier, the broker would pool the margin of all the traders and place it with the exchange. Some of these brokers were misusing client securities. Now, the trader pledges it in his account in favor of the broker which is repledged in favour of the exchange thereby eliminating the pooling system. This also addressed the issue of siphoning of funds besides alleviating misuse of the securities.
Buch revealed that this was a huge technological change in the entire market and it’s never been done anywhere else in the world ever. So today in terms of protection of client securities, there is nobody better than India, she stated. This is the power of technology in terms of risk management. Another instance she underscored is e-KYC and today businesses onboard about 93% of their clients via e-KYC. This has brought down the costs and helped deliver good results, and corporates have swept across tier 4 and tier 5 cities making financial inclusion economically viable for corporates.
Towards the end of her address, Buch talked about the role of data analytics in analyzing the impact of policies, their implications on the target audience, and the mitigation of potential issues that may arise. The regulator analyses it at a very granular level as to which entity and for what reason is going to be impacted by those policies. So, policymaking has a huge requirement for data analytics, Buch added.
(Trisha Shreyashi is an independent legal counsel, and a panelist at HBR Advisory Council)