The Securities and Exchange Board of India (SEBI) is developing an advanced “second surveillance system” designed to proactively identify, isolate, and delist “bad elements” operating among publicly listed companies, according to Whole-Time Member Kamlesh Chandra Varshney.
Speaking on regulatory priorities and market integrity, Varshney highlighted that while Indian equity markets are experiencing unprecedented retail participation, rapid expansion must be matched with aggressive defensive safeguards. The upcoming surveillance framework expands beyond traditional trade-pattern alerts to target companies that exploit listing status for illicit fund diversion, stock rigging, or regulatory arbitrage. Concurrently, the regulator is ramping up scrutiny on unsuitable and small-cap initial public offerings (IPOs)—particularly across the booming Small and Medium Enterprise (SME) segment—to prevent speculative retail traps before shares ever hit the trading floor.
Key Takeaways
- The “Second Surveillance System”: SEBI is constructing a supplementary, high-precision surveillance architecture specifically focused on entity-level behavioral audits and corporate governance irregularities among listed firms.
- Compulsory Delisting Pipeline: The primary operational objective of the new system is to identify chronic non-compliant firms, shell entities, and problematic promoters for systematic removal and delisting from national exchanges.
- Pre-Emptive IPO Screening: The regulator is tightening gatekeeping protocols on small-scale public issues and SME IPOs to filter out unviable, low-substance business models designed to capitalize on retail euphoria.
- Corporate Governance for SMEs: Emphasizing that smaller companies cannot bypass compliance standards, SEBI is enforcing rigorous disclosure requirements and governance baselines on SME boards.
- Pairing Inclusion with Protection: The initiative directly complements outreach programs like Project Jagrook, ensuring that bringing first-time domestic retail investors into capital markets is backed by institutional shielding against fraudulent syndicates.
- AI and Forensic Data Integration: The new engine builds upon SEBI’s growing technological stack (such as the Sudarshan algorithmic monitoring tool and IMSS platform), linking banking transactions, digital communications, and trading terminal telemetry to detect coordinated manipulation.
1. Central Question: Why Does SEBI Need a “Second Surveillance System”?
Direct Answer: Traditional market surveillance systems—such as stock exchange circuit breakers, the Graded Surveillance Measure (GSM), and the Enhanced Surveillance Measure (ESM)—are largely reactive and transaction-focused, designed to flag abnormal intra-day price swings, volume spikes, and short-term volatility.
However, “bad elements” inside listed companies often operate below these price thresholds through long-horizon balance sheet manipulation, round-tripping of funds via related-party shell entities, circular invoice generation, and gradual promoter share pledging schemes. The second surveillance system functions as a forensic, entity-level surveillance layer. By combining machine learning pattern recognition with real-time financial filings, tax registries, and corporate registry audits, the system isolates non-genuine corporate structures and initiates regulatory enforcement—including compulsory delisting—before retail investors suffer irreversible capital erosion.
THE DUAL SURVEILLANCE PARADIGM
│
┌──────────────────────────────┴──────────────────────────────┐
▼ ▼
PRIMARY SURVEILLANCE (EXCHANGE & IMSS) SECOND SURVEILLANCE (NEW ENGINE)
• Real-time tick & trade-level monitoring • Entity-level behavioral & forensic audit
• Price volatility, order-book spoofing & wash trades • Related-party routing, shell networks & fund diversion
• Short-term ASM/ESM price band restrictions • Identifying non-genuine listings for delisting
• Focus: Order-book & market liquidity integrity • Focus: Structural corporate governance & fraud removal
│ │
└──────────────────────────────┬──────────────────────────────┘
▼
UNIFIED MARKET INTEGRITY UMBRELLA
Safeguards retail capital across trading terminals and
corporate boardrooms before systemic damage materializes.
2. Target Vectors: Where the New System Focuses
SEBI leadership has outlined three specific operational arenas where the new surveillance mechanism will direct automated scrutiny:
+-----------------------------------------------------------------------------------+
| SEBI SECOND SURVEILLANCE SYSTEM: OPERATIONAL SCOPE |
+-----------------------------------------------------------------------------------+
| Operational Target | Vulnerability Vector | Regulatory Countermeasure |
+--------------------------------+--------------------------+-----------------------+
| **Problematic Listed Entities**| Shell operations, fund | Systematic identification for formal |
| | diversion, zombie firms | compulsory delisting from BSE/NSE |
+--------------------------------+--------------------------+-----------------------+
| **Small-Scale & SME IPOs** | Inflated valuations, weak| Enhanced pre-clearance filters to halt|
| | fundamentals, hype synd. | retail capital entrapment |
+--------------------------------+--------------------------+-----------------------+
| **Pump-and-Dump Networks** | Social media / Telegram | Cross-referencing digital promotion |
| | "finfluencer" collusions | with beneficial ownership trading runs|
+--------------------------------+--------------------------+-----------------------+
| **Related-Party Circularity** | Unaudited loan advances | Forensic tracing across GSTN, MCA21, |
| | and fictitious revenue | and banking payment clearing corridors|
+--------------------------------+--------------------------+-----------------------+
PRE-EMPTIVE CRACKDOWN PIPELINE
│
▼
1. AUTOMATED FORENSIC TELEMETRY INGESTION
(MCA filings, bank statements, GST reconciliations, order books)
│
▼
2. SECOND SURVEILLANCE PATTERN IDENTIFICATION
Flags shell structures, round-tripped capital & fake revenue
│
▼
3. RISK CATEGORIZATION & ENTITY ISOLATION
Differentiates struggling firms from bad-faith syndicates
│
▼
4. ENFORCEMENT & COMPULSORY DELISTING DISPATCH
Trading suspension ──► Promoter freeze ──► Orderly exit
1. The SME IPO Screening Firewall
The Indian capital market has witnessed extraordinary retail subscription figures across SME IPOs, with modest corporate issues frequently being oversubscribed dozens or hundreds of times within hours. Kamlesh Chandra Varshney noted that SEBI is zeroing in on high-risk, unsuitable offerings at the entry gate. The new surveillance system analyzes draft prospectuses against forensic background databases to ensure promoters cannot float shell businesses or artificially book-build pre-IPO gray market hype.
2. Weeding Out “Zombie” and Shell Listed Firms
Thousands of micro-cap entities listed on legacy domestic bourses have negligible business operations yet remain listed vehicles. These “zombies” frequently serve as instruments for illicit money laundering, tax evasion, and artificial stock pumping schemes. The second surveillance system is tuned to detect dormant operational metrics and initiate coordinated delisting proceedings, systematically cleaning exchange listings.
3. Technology Stack: Moving from Manual Scrutiny to Algorithmic Enforcement
The second surveillance framework marks an evolution in how SEBI deploys artificial intelligence and algorithmic models across its regulatory jurisdiction:
+-----------------------------------------------------------------------------------+
| SEBI TECHNOLOGY SURVEILLANCE EVOLUTION |
+-----------------------------------------------------------------------------------+
| Technology Tool / System | Technical Function & Regulatory Objective |
+--------------------------------+---------------------------------------------------+
| **Sudarshan (AI Engine)** | Scans open-web, video, and social media platforms |
| | to take down illegal finfluencer advice & scams |
+--------------------------------+---------------------------------------------------+
| **IMSS (Integrated Market SS)**| Analyzes real-time algorithmic trades, front- |
| | running, and unusual price-volume concentrations |
+--------------------------------+---------------------------------------------------+
| **SEBI Check Interface** | UPI-linked verification allowing retail investors |
| | to validate registered entities before transfers |
+--------------------------------+---------------------------------------------------+
| **Second Surveillance System** | Entity-level forensics tracking fund diversion, |
| | related-party collusion, and unviable SME IPOs |
+--------------------------------+---------------------------------------------------+
By connecting previously isolated data streams—such as corporate disclosures filed on exchange portals, banking money trails tracked through regulatory coordination, and social-media promotion feeds—the new system creates an end-to-end audit graph. When a micro-cap firm displays sudden price surges while internal filings reveal uncollected trade receivables, related-party unsecured loans, or auditor resignations, the system automatically flags the entity for immediate regulatory intervention.
4. Policy Philosophy: Balancing Market Depth with Capital Protection
The regulatory push coincides with initiatives like Project Jagrook, an investor-education and market-deepening effort aimed at bringing households from Tier-2, Tier-3, and rural India into equity savings.
THE REGULATORY STRENGTH PARADOX
│
┌───────────────────────────────────┼───────────────────────────────────┐
▼ ▼ ▼
DEMOCRATIZING CAPITAL ACCESS THE RESPONSIBILITY IMPERATIVE WEEDING OUT BAD ACTORS
Demat accounts surge past 150M+ New retail entrants lack deep Systemic delisting protects
as household savings rotate financial literacy to identify the broad market's credibility
from physical assets to equities. manipulated micro-cap accounting. and long-term investor trust.
Varshney emphasized that capital market expansion cannot succeed on outreach alone. If first-time investors who enter the market encounter fraudulent promoter operators or manipulated SME issues, trust in institutional investing erodes permanently. Building a surveillance system specifically aimed at eliminating these bad actors establishes a baseline of trust necessary to sustain India’s equity investment boom.
Frequently Asked Questions (FAQs)
What is SEBI’s new “second surveillance system”?
The second surveillance system is an advanced technological monitoring framework being developed by SEBI to detect entity-level governance violations, fraud, and bad actors among listed companies, specifically facilitating the identification and compulsory delisting of problematic firms.
Why is SEBI targeting SME IPOs with this surveillance system?
The regulator has observed rampant speculative retail exuberance and instances of valuation inflation in the SME segment. The new surveillance filters are designed to screen out unsuitable, hollow, or manipulated IPO proposals before they can trap retail investor capital.
Who announced the development of this system?
The initiative was detailed by SEBI Whole-Time Member Kamlesh Chandra Varshney, who oversees Corporate Finance and Market Surveillance at the capital markets regulator.
How does this differ from SEBI’s existing surveillance mechanisms?
Existing systems like the Integrated Market Surveillance System (IMSS), ASM, and ESM primarily monitor trading volumes, price volatility, and market transactions in real time. The second surveillance system focuses deeper on entity-level behavioral audits, fund diversions, promoter actions, and accounting forensics.
What is Project Jagrook?
Project Jagrook is an investor education and market-outreach campaign spearheaded by SEBI and industry institutions to foster financial literacy and encourage retail participation in formal capital markets.
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