When asked to address serious charges of conflict of interest, by Hindenburg Research and the Congress Party which have made media headlines for the past two months, Madhabi Puri Buch, the chairperson of the Securities and Exchange Board of India (SEBI) dodged an appearance before the parliamentary accounts committee (PAC) on 24th October. Earlier, a full-board meeting of SEBI, on 30th September, ignored its fiduciary duty to investigate allegations of serious conflict.
What is worse, even if Ms Buch and SEBI’s whole-time members (WTMs) were compliant with its flimsy Code of Avoiding Conflict of Interest (Conflict Code) adopted in 2008, that the Code has no legal sanctity, as I wrote in my column last week (Read:
SEBI’s Conflict of Interest Code: A Riddle Wrapped in a Mystery inside an Enigma). On 29th October, Mr Pawan Khera of the Congress levelled a fresh set of allegations about conflict of interest, where the association of Ms Buch as well as WTM Ananth Narayan G with regulated entities is even more egregious.
At stake here is not a battle to protect a political appointee, but the integrity of India’s regulatory framework, since SEBI oversees one of the world’s largest capital markets with a US$5trn (trillion) valuation. More pertinently, no other financial regulator, including the Reserve Bank of India (RBI), or the insurance or pension regulator, has felt the need for a separate, diluted code, irrespective of its legality.
Legally Void
The illegality of the Conflict Code is crystal clear. The government’s power to frame service rules emanate from Section 5(1) of the SEBI Act, 1992. Further, Section 29, read with Section 2(f), requires that these rules have to be published in the official gazette and Section 31 further mandates that the ‘rules so framed shall be placed before the Parliament for its approval’. None of this happened in connection with the Conflict Code.
Section 19 explicitly says that service matters “with respect to which no express provision has been made in these rules shall be referred in each case, to the Central Government for its decision and the decision of the Central Government thereon shall be final.” The Conflict Code of 2008 was not referred to the government or approved.
Section 20 says “The Central Government shall have power to relax the provisions of any of these rules with respect to any class or category of persons.” No such relaxation or dilution of service rules has been permitted.
Perhaps aware of the dodgy legal standing the SEBI board, in December 2008, decided, “This Code shall be
in addition to the provisions of Section 7 A of the SEBI Act,1992 Rule 3 (1) and 19 A (1) of the SEBI (Terms and Conditions of Service of Chairman and Members) Rules, 1992, and Regulations 9 and 11 of the SEBI
(Procedure for Board Meetings) Regulations, 2001.” (emphasis provided)
This means that the stricter government service rules will have precedence; they provide no scope for ‘trading’ in shares by the chairperson or WTM, nor do they lower the standards of conflict applicable to other regulators and senior government officials. As advocate Murali Neelakantan says, the Code is “void for lacking legislative competence.”
Omission in 2018 Amendment
Did SEBI and the government fail to examine and adopt the Conflict Code in 2018? Was it even discussed? This is important since Ms Buch was appointed as WTM in 2017 and may have complied with reduced restrictions on financial disclosures and conflicts.
The question is: Who will investigate the issue and initiate corrective action? SEBI now has two private sector entrants in top regulatory functions and the regulatory body shows no indication of wanting to address, investigate or correct the situation.
The Central government is more focused on dismissing the matter as a political slugfest. This avoidance means that the illegal Conflict Code remains in place, exposing the regulator to further credibility erosion.
SEBI’s top brass has immense powers to make rules, including emergency powers that allow it ban people from the markets or halt business operations overnight, are themselves subject to rather weaker and opaque conduct rules under a dodgy code.
The laxity in SEBI’s standards extends beyond the Conflict Code; there is a worrying lack of transparency in other aspects of its functioning as well. The ‘secret’ exemption from the reverse book-building granted to ICICI Securities, which merged with ICICI Bank a few months ago, is one example. SEBI has argued in court that the exemption is an administrative decision which does not contemplate a hearing and the passing of a reasoned order, even though it impacts a large swathe of shareholders who believe they have not got a fair valuation.
Ms Buch was directly associated with this company and has been regularly encashing employee stock options (ESOPs) granted by ICICI Bank which is the beneficiary of the exemption (
ICICI Securities Delisting Saga: Bombay HC Asks SEBI To Disclose Exemption Letter.) With no support from the regulator, affected investors have had to approach the civil courts which are less familiar with the nuances of capital market regulation.
SEBI has aggressively defended the secrecy around this decision. In a recent affidavit, it argues that the Supreme Court, “in a catena of judgments, has emphasized the need for giving a wide latitude of judicial deference to decisions taken by expert regulatory bodies in the realm of finance or economics” and, hence, the high court should not use its writ jurisdiction to interfere with SEBI’s decision.
Similarly, SEBI has the power to ‘waive disclosures’ for companies planning to list through an initial public offerings (IPOs); but there is no transparency in the process. The same is true of ‘settlement’ of offences by making a payment, without admitting or denying guilt. It is a non-transparent process where the amount paid depends on the officer-in-charge and the skill/ influence of negotiating lawyers, rather than the seriousness of charges.
SEBI’s legally weak or contradictory orders has led to repeated strictures by the appellate tribunal and courts. Many WTMs have no legal background so important cases have crumbled on appeal because of throw-away sentences (deliberate or otherwise) destroyed detailed investigations. The National Stock Exchange (NSE) co-location case of 2015 is one such. After dragging on for almost a decade, NSE’s new management is determined to close cases and move on, even after having won huge reprieves on appeal, precisely because of SEBI’s weak orders.
Latitude from courts, combined with a lack of effective oversight by the finance ministry and the Central government, has allowed a dangerous level of freedom and lack of accountability to the SEBI chairperson and WTMs, for a long time. Since the government seems determined to stonewall any discussion on SEBI and its functioning, the real question is: Who will hold SEBI accountable and protect investors?
First, under Section 19 A(1) of the Terms and Conditions of Service of Chairman and Members Rules, 1992 (amended in 2018), the chairman or WTM “shall be a person who does not, and will not, have any such financial or other interests as are likely to affect prejudicially his functions as such Chairman or Member.” There is no scope to voluntarily adopt a diluted Conflict Code, as was done in 2008. 
Why should sebi board have only IAS or IRS or professors of mgt colleges or only from nationalised banks or private banks. There are dime a dozen practitioners from market infrastructure providers or other players . We need a regulation seeking change in composition of boards of regulatory bodies like SEBI or RBI or RERA
If they refuse to invest in India and pull out their funds because the regulatory environment is so dodgy, the Indian govt may be forced to take action.
Until then, the GoI will simply ignore the scandal.