The Securities and Exchange Board of India (SEBI) is gearing up to take several new measures to strengthen the security of crores of investors investing in the stock market. The market regulator is devising security measures to prevent misuse of trading terminals by brokers. Along with this, the possibility of imposing different compliance rules for stockbrokers based on their business capacity, number of clients and reliance on technology is also being explored.
SEBI Chairman Tuhin Kant Pandey shared his plans for the future of the market and regulatory reforms at the 16th International Capital Market Convention of the Association of National Exchange Members of India (ANMI) in Mumbai on October 24. These schemes aim to increase market transparency, protect investors’ interests and reduce financial risks arising from the use of technology in the market.
Preparedness to Prevent Misuse of Trading Terminals
SEBI is developing a framework to curb the alleged abuse of some brokers’ trading terminals.
Actually, a trading terminal is a system through which buy and sell orders are placed in the stock market. Brokers facilitate their customers to buy and sell shares through these systems.
Some broking firms are alleged to provide trading facilities to individual traders through their accounts. In return, they were charged a fee or a share of the profits. In such cases, regulatory provisions regarding margin and disclosure are likely to be bypassed. To monitor such activities, SEBI is considering measures such as linking trading terminals with their MAC addresses and static IP addresses.
A MAC address is an identifier of a network device, while an IP address helps identify a device or connection on a network. Linking this information to trading terminals can help regulators track where trading is taking place and who is using the respective terminal. These measures are part of the framework currently under consideration. These have not been promulgated as final regulations.
Rules may differ for small and large brokers
SEBI is considering introducing graded compliance for stock brokers i.e. different compliance regime according to their situation and risk. Currently, brokers have to comply with applicable regulatory rules. In the proposed system, regulations and compliance requirements can be determined based on the size of the broker, the risk appetite of the clients and the reliance on technology. For example, a large-scale broker may have a large number of clients and complex technology systems. In such a situation, monitoring and risk management requirements may also be different for them. At the same time, there is scope for smaller brokers to tailor the compliance process to suit their capacity and business activities.
What would be its potential benefits?
- The compliance burden on brokers may be commensurate with their business activities.
- Monitoring of hazardous occupations can be improved.
- A more effective use of regulatory resources will be possible.
- This can help protect investors and increase transparency in the market.
Review of Short Selling and Securities Lending Rules
SEBI is reviewing the rules on short selling and securities lending and borrowing (SLB) to improve liquidity and fair pricing process in the stock market. Short selling is a trading strategy in which a trader takes a position to sell a stock in anticipation of its price falling. Later, when the price falls, an attempt is made to make a profit by buying at a lower price. However, if the price increases, the trader can also suffer losses.
Under the SLB system, securities can be borrowed and offered in the market as per the prescribed conditions. This can help in promoting trading activities and improving the availability of shares in the market. By reviewing these arrangements, SEBI seeks to ensure that trading in the market remains smooth and share prices are better determined. Currently, these rules are under review. The final details of what kind of changes this will bring to the short selling rules have not been released.
Business will increase in corporate bonds, market making framework will be worked on
SEBI is developing a market making framework to promote secondary trading in the corporate bond market. Corporate bonds are financial instruments through which companies raise money from investors. In return they pay interest and principal as per stipulated terms.
After issuing these bonds, other investors also have the option to buy and sell them. It is called secondary market trading. But if there aren’t enough buyers and sellers in the market, it can be difficult for investors to sell bonds at reasonable prices.
The objective of the market making system is to improve the availability and liquidity of buying and selling in the market. This can help increase investor participation in corporate bonds. Only after the framework is finalized and implemented can its real impact be assessed.
Preparation of tokenized corporate bonds under Demat 2.0
SEBI is working towards making tokenized corporate bonds available for trading in the secondary market in the next phase of the Demat 2.0 initiative. Tokenization is the process in which the rights associated with an asset or financial instrument are represented in the form of digital tokens. In the case of corporate bonds, this technology can be used to make the recording and transaction process of financial instruments more efficient.
This can potentially improve transaction processing and help increase liquidity in the market. However, tokenization itself does not eliminate risk. Its success will depend on the level of technology, regulatory protections, investor rights and market adoption. The objective of this SEBI scheme is to make the Indian corporate bond market more modern and efficient.
Sebi is eyeing the use of AI, a secure testing system will be created
The use of artificial intelligence i.e. AI is rapidly increasing in the financial markets. With the increasing role of AI-based tools in trading, data analysis and investment decisions, their risks are also coming to the fore. Keeping this in mind, SEBI is looking to develop an AI sandbox. An AI sandbox is a controlled environment where new AI tools and technologies can be tested under limited conditions. Its purpose is to test how safe and effective the technology is before using it in real situations.
SEBI is also finalizing guidelines on responsible use of AI. According to the report, these guidelines will emphasize aspects such as clear accountability, data control, immediate system shutdown when needed and human supervision. Its purpose is to promote the development of new technologies and at the same time protect investors and the market from potential losses.
Warning to brokers on cyber security
The Sebi chairman advised market-related organizations to make cyber security a business priority instead of just treating it as an IT department expense. Today, a large number of transactions in the stock market are done through digital systems, algorithms and automated technologies. In such a scenario, a major system failure or cyber attack could affect a large number of investors. If the system of the brokerage platform suddenly shuts down, investors may face difficulty in timely placing orders or managing their positions.
Likewise, a data leak or cyber attack can damage consumer information and market confidence. SEBI stresses that brokers should regularly test their systems, be prepared for technical glitches and strengthen cyber security.
A scheme to simplify the investment process for global investors and NRIs
- SEBI is also working to simplify the process of investing in the Indian market for foreign investors and non-resident Indians (NRIs).
- Under this, measures like digital onboarding, simplifying the KYC process and reducing paperwork are being considered.
- KYC stands for Know Your Customer is the process under which financial institutions verify the identity and other important information of the customer.
- The objective of simplifying the investment process is to connect more and more investors to the Indian capital market. However, along with this, maintaining the necessary security measures will also be the priority of the regulator.
The process of monitoring and reporting in the market will also be simplified.
SEBI is also working on plans to integrate its inspection portal into a digital workflow to make regulatory monitoring faster and more effective. In addition, there are plans to extend the common reporting platform to depositories to facilitate the reporting process. This can help meet the reporting requirements of stock exchanges and depositories through one report.
SEBI is also working on simplifying rules for depository participants and strengthening fraud protection. Steps are also being taken to reduce some of the processing costs associated with tender offers, share buybacks and offers for sale (OFS). Additionally, portfolio management services (PMS) and cash segment for custodial clients including Alternative Investment Funds (AIFs). Automated give-up and take-up facility is being extended. This is intended to minimize unnecessary blockage of funds and margin while awaiting custodian confirmation.
