One of the first actions of the new Chairman of the Securities and Exchange Board of India (SEBI) was to postpone the implementation of the controversial MAPIN (Central Database of Securities Market Participants’ and Investors’ Identification Numbers) database and to set up a committee to re-examine its feasibility, structure and implementation.
The committee did what was expected of it and has recommended the suspension of MAPIN in its present form, after taking into account the widespread opposition to the biometric identification mandated by SEBI. Fortunately, it has refrained from throwing out the baby with the bathwater and has emphatically recognised the need to create a Unique Identification Number (UIN) for market participants, in order to clamp down on brazen price manipulation and large chunks of unaccounted money floating in the market through benami fronts.
After all, MAPIN’s objective in allotting Unique Identification Numbers (UINs) and creating audit trails of transactions was clearly laudable. It is the implementation that was flawed and non-transparent and was also conducted in a manner that caused enormous harassment to senior citizens or those who were physically disabled. MAPIN’s biggest problem was with the manner in which it was sought to be imposed on investors and market participants (especially the biometric identification numbers that are normally associated with criminality) without any public discussion or assurance regarding data privacy of information collected by the database.
Another problem with MAPIN was that it failed, on one hand, to converge the multiple identities already created by other government agencies and on the other hand granted exemptions to several categories of investors, defeating the objective of creating a comprehensive database of investors and market participants. Among the many complaints against the original MAPIN database was the fact that it made no attempt to track scamsters and other wealthy investors who have been hiding behind multiple layers of sub-accounts of Foreign Institutional Investors (FIIs). Clearly, this is discriminatory to large domestic investors who trade directly in the market. (The SEBI committee has addressed this issue too, by recommending MAPIN for FIIs and their sub-accounts). Consequently, MAPIN was turning into yet another entry barrier for new investors and its utility was also unclear.
Hence, the SEBI-appointed Committee recommends the setting up of another database, also called MAPIN, (possibly without biometric identification) which will integrate the data already captured by the present system. Interestingly, the report makes the telling comment that “the cost involved in generating the new unique ID, maintenance of database, issuance of cards etc, shall be significantly lower than the present system”, but does not explain how it has arrived at this conclusion and whether investors were being over-charged in the present system. It however suggests that it SEBI should consider bearing the cost of the changes proposed by the new system.
Interestingly, the committee notes that software experts that it consulted were of the unanimous view that while biometrics-based identification is truly unique, unique IDs can also be generated through the “dedupe” software and other related tools. The committee has chosen this option. Also, in order to maintain consistency, the number generation logic and format/series shall be the same as in the existing MAPIN database. Moreover, it says that MAPIN IDs already issued shall continue to remain valid, while the additional parameters and information that will be required under the new MAPIN will be added on by having all investors fill a new set of forms.
The SEBI committee has exposed the many inconsistencies and haphazard implementation of MAPIN, including the exemptions granted to quell resistance from influential pockets of investors. It also examined stock exchange data and found that only 1.62 lakh and 0.76 lakh investors on the NSE and BSE respectively had single order entries above Rs one lakh (the cut off for MAPIN registration) in the January – February 2005 period. This meant that MAPIN was unlikely to even emerge as an inventory of all market participants.
The Committee proposes to change all that. It has now recommended that the creation of a comprehensive database of market participants and also outlined in detail the objectives and utility of the proposed MAPIN numbers, without resorting to biometric identification. A significant recommendation of the new system is the linkage of specific bank accounts to the new UIN. This alone will be a big step forward in enabling a clear trail of money and trapping fraud and manipulation.
Interestingly, the committee also points out that the earlier MAPIN had taken no steps to put in place a regular updation system. Considering the high level of attrition and job changes in financial services firms, some of the data captured on the now-defunct MAPIN database would already have been outdated. However, one is a little uneasy about the MAPIN Committee’s recommendation that data updation should be entrusted to brokers. Clearly, brokers can only transmit information to the MAPIN database. It is the implementation agency that must be in charge of verifying the data and ensuring its accuracy.
Since the SEBI Committee has proposed the setting up of a new technical group to examine the implementation feasibility, cost, logistics and schedule for creating such a database, this issue too must be examined by the committee. This means that MAPIN is effectively shelved for the moment, but the lesson for this expensive exercise is that the regulator must also follow the same transparent process of debate, discussion and information dissemination that it expects from companies, regulated entities and market participants.
(This column was first published in Divvya Bhaskar on July 4,2005 in Gujarati).