Intend To Narrow Regulatory Gaps To Keep Pace With Innovation: SEBI Chief

Securities and Exchange Board of India (SEBI) chairperson Madhabi Puri Buch has said that the market watchdog has stepped up vigil and plans to narrow the regulatory gap in the startup space.

“There is likely to be a regulatory gap when there is something new and innovative that happens in the market. It is up to the regulator to keep pace with that. Our intention is to narrow that regulatory gap in the startup ecosystem,” said Puri Buch.

Noting that the markets watchdog has been ‘a little late to the party’ in the past, she added that SEBI aims to close the chasm in the arena. 

The SEBI chairperson made the comments while addressing the third edition of the Global Fintech Fest 2022. 

In a stern warning, the SEBI chief said that businesses based on the ‘black box’ model that are not open to being audited or validated, would not be permitted. 

“If your business model is woven around a black box, which is not open to sunlight for disinfecting or not capable of being audited or validated, it cannot be permitted”, added Puri Buch.

Black box businesses allow users to analyse market data and make their bets based on that data. While a user can comprehend the result, they are not allowed to see the logic behind that.

The statement comes amidst a slew of reports doing the rounds that the market regulator may crackdown on algo trading. 

In a stern warning, Buch said that the markets regulator was ‘not for or against algo trading’ as long as there was sufficient transparency and disclosures. 

In the recent past, many top NSE officials, in connivance with institutional investors, have allegedly misused algo trading to benefit themselves at the expense of other inventors. In the NSE co-location scam, top executives of NSE used their co-located servers at NSE offices to get rather quicker access to data and, thereby, make better bets compared to others who received the data later. 

Another major takeaway of the SEBI chief’s address was that it reiterated the push for data democratisation, adding that any attempt by private entities to own market data would not be tolerated.

“In India, we have a stated objective and implemented evidence that the infrastructure for innovation will be a public good…The rails will be a public good. Private innovations need to be built on top of those rails… If somebody has a business model, where the presumption is that they will own the infrastructure, you are setting yourself for a rude shock subsequently,” noted SEBI boss. 

Delivering the keynote address, Madhabi Puri Buch also pointed out the core principles that guide regulators. 

“There are some key principles that guide a regulator. These include anonymity, transparency, financial inclusion and structural vulnerability,” added Buch.

The Lax Wild West

This was the second event where Puri Buch spoke since taking charge as SEBI chairperson. In both the addresses, she put due emphasis on new-age tech startups adhering to transparency. 

In pursuance to that, SEBI reportedly made multiple surprise visits to the offices of more than 20 alternate investment funds (AIFs) including private equity (PE) funds and hedge funds to verify whether these players followed all related norms. 

Cloe on the heels of that, the markets watchdog also proposed a framework to regulate investment tech startups selling direct plans of mutual funds. 

Stepping up the heat, SEBI, earlier this month, also reportedly asked PE and venture capital (VC) funds to share the calculation process for the valuation of their portfolio startups. However on a later date, Buch publicly stated that startups were free to list their shares at prices they deem ‘appropriate.’

As if that was not enough, SEBI reportedly also asked Indian PE and VC funds to disclose the details of their fund managers. The move was likely formulated to keep an eye on foreign investors and to ensure that they do not step their bounds.