The past fiscal saw a notable increase in administrative warnings, inspections and investigations from the market regulator. SEBI issued 377 administrative warnings to alternative investment funds (AIFs) in FY24 compared with 20 the previous year. For FPIs, the figure stood at 1,314, up 5x from FY23 and for merchant bankers it was 2.5x the previous year.

The number of inspections for brokers rose to 146 from 87, while that for merchant bankers to 56 from 42 in the same period. The number of investigations taken up surged to 342 in FY24 from 144 in the year-ago period(see table). “Stricter regulations and advanced surveillance technologies have helped SEBI detect instances of non-compliance or risky practices, leading to more frequent inspections and warnings,” said Sumit Agrawal, Partner, Regstreet Law Advisors.

SEBI’s vigilance

The trend aligns with global regulatory practices of financial market regulators increasing their oversight of market activities, said Agrawal, and should be viewed as a sign of SEBI’s vigilance rather than an overreach.

Harish Kumar, Partner at Luthra and Luthra Law Offices India, attributes the rise in regulatory activity to the use of artificial intelligence tools to investigate breaches and default.

Market observers believe the surge in trading activity and higher retail participation has necessitated greater regulatory scrutiny.

The year 2023-24 saw the highest-ever registered cumulative turnover of ₹217 lakh crore in the equity cash segment. Individual investors accounted for more than a third of the total turnover. On average, 110 lakh individual investors carried out trades in the cash segment at NSE, compared to 88 lakh investors during 2022-23.

Broker inspections last fiscal covered themes such as advance brokerage, control over authorised persons, technical glitches, misuse of trading terminals and handling of funds and securities of clients. “The surge in administrative warnings for FPIs may be due to changes in the compliance framework, especially the reporting norms. The potential risks of misuse of FPI vehicles for breach of public shareholding norms and Press Note 3 requirements could be a contributing factor,” said Rutu Gandhi, Partner, Cyril Amarchand Mangaldas.

In August last year, SEBI came up with a circular mandating all FPIs holding concentrated positions in Indian equities to disclose granular details of all entities holding any ownership, economic interest, or control in an FPI, on a look through basis, without any threshold.

Important measure

Regulatory oversight is important from a policy perspective and the need to maintain a positive rating with FATF, which does a periodical review of a country’s financial system and its ability to prevent criminal abuse, said Gandhi. 

“The regulator’s crackdown on merchant bankers, coupled with increased scrutiny of AIFs and FPIs, demonstrates a commitment to maintaining market integrity. Such actions deter fraudulent activities and manipulative practices that often thrive in bullish environments,” said Sanjay Israni, Partner, Desai & Diwanji.

SEBI has, for instance, said it would take action against three merchant bankers who have been repeatedly accused of inflating IPO subscriptions, said Israni.

Experts attribute the surge in the number of administrative warnings to AIFs to delays in filing of quarterly reports and glitches on the SEBI portal. “The online reporting formats trigger alerts to the supervisory division of the regulator, which picks up deviations and further investigates. Such investigations lead to minor or major discrepancies and few interpretational gaps,” said Leelavathi Naidu, Partner, IC Universal Legal.

Related Topics