National markets watchdog Securities and Exchange Board of India (Sebi) is in the process of implementing a project on automation of inspection and surveillance of mutual funds to cut down on the lag in spotting of violations.

The regulator is planning a major technological leap in its surveillance and investigation functions. “Sebi is also in the process of implementing a project on automation of inspections and surveillance of mutual fund,” the Sebi annual report for 2019-20 quoted Chairman Ajay Tyagi as saying.

Under the project, MF-related data would be ingested in the Sebi database and use of algorithms in order to generate instances of breaches of regulatory guidelines by mutual funds in respect of several important guidelines where quantitative analysis is possible.

Successful implementation of this project will enable Sebi to leverage technology to move towards automation of inspections of mutual funds, 100 per cent inspection of data in place of samples, and to reduce the lag in recognition of violation, according to the annual report.

Sebi has also taken measures to strengthen the regulatory framework for debt-oriented schemes of MFs and is ready to initiate more reforms if required, Tyagi says.

The steps taken by Sebi for debt mutual funds include mandating minimum investments in liquid assets and introduction of exit load for liquid schemes, placing restrictions on investment in unlisted and unrated debt securities and review of the sectoral limits on investments.

It has also taken steps to improve the robustness of valuation of debt securities by mutual funds. These reforms are aimed at placing mutual funds in a better position to deal with credit events and redemption pressures, strengthening prudential norms for investments and bringing more transparency in their investments, the Sebi chief says. “More reforms, as may be required, would be brought in going forward.”

The regulator has developed an in-house automated system by which it is able to do system-based reconciliation of client level securities holdings by brokers, detecting client securities misuse by brokers, if any.

To detect possible market manipulation and strengthen market supervision through technology solutions, Sebi has initiated a “data analytics and data models project”.

Apart from taking steps towards increasing technological sophistication of the markets, Sebi says it has continuously upgraded technology in its own regulatory functions. It has started work on a data lake project which would have the capability to store and retrieve quickly, a large amount of structured, semi-structured and unstructured data.

The data lake project will support advanced analytical tools, such as artificial intelligence and machine learning (AI/ML), deep learning, big data analytics, pattern recognition, processing of structured and unstructured data, text mining and natural language processing thereby significantly augmenting surveillance capabilities.

At the same time, to safeguard against the associated risks, including cyber frauds in newer technologies, Sebi implemented its Security and Network Operations Centre project, adhering to international security standards and best practices.