Summary of this article
SEBI is deploying artificial intelligence to monitor portfolio managers.
The new technology has detected illegal front running practices.
Upcoming regulatory changes will protect investors and boost transparency.
Investors who invest through Portfolio Management Services(PMS) can soon expect increased transparency as the Securities and Exchange Board of India (Sebi) is set to increase its oversight of the industry.
According to a recent report by The Times of India, the regulator has deployed AI driven surveillance systems to monitor the PMS space. The report cited a speech delivered by Manoj Kumar, executive director Sebi at the Association of Portfolio Managers in India's (Apmi) PMS Leadership Conclave who claimed that these systems have detected patterns of ‘front running’ within the PMS space.
“Recently, we have noticed our AI generating enough alerts, and over a period of time, the patterns emerging from those alerts suggest that a certain amount of front-running is also happening in the PMS industry,” Kumar said.
Kumar added that the market regulator is currently analysing how instances of front-running in the PMS space have impacted investors.
“We always believed this was something largely confined to the mutual fund space. We are analysing how it has impacted investors," Kumar said.
What Is Front Running
Front running refers to an illegal practice where trades are executed on a security basis based on advance knowledge of large and pending client orders in the fund manager’s own account.
In order to curb instances of such manipulation, Sebi is planning the deployment of AI to identify irregular trading behaviors and price manipulations. The deployment of AI based surveillance systems is expected to speed up the investigation process.
According to the report Sebi is adopting a balanced approach to counter the issue. The regulator is expected to take an accommodative stance for general compliance, provided any violations remain unintended. However, this leniency does not extend to market manipulation.
New PMS Regulatory Framework
On the other hand, the market regulator is also in the final stages of drafting a consultation paper to overhaul the existing PMS regulatory framework according to a recent report by The Hindu Businessline. Notably, the document is expected to be released soon.
Given the growth of the securities market and the growth in the PMS business necessitates a total alignment of the rules with today's complex market dynamics. Notably the domestic PMS industry’s overall assets under management now stand at an estimated Rs 42.5 lakh crore. The regulator plans to modernise compliance, boost systemic transparency, and ultimately strengthen investor protection through the revamp of existing regulations.
For the PMS investor, these developments can potentially offer reassurance and transparency. Stronger governance standards, tighter ongoing compliance, and AI led oversight can increase accountability in the PMS space.
