Full marks to the high-level committee’s report on conflict of interest for delivering a thorough, dispassionate analysis of the inadequacies and lack of legal enforceability, of the voluntary code of ethics applicable to the top brass of the Securities and Exchange Board of India (SEBI), since 2008. The report has also proposed a set of sensible, enforceable reforms, such as uniform definitions, public disclosures, investment restrictions, robust recusal processes and independent ethics oversight—benchmarking global standards, as well as parity of rules within the organisation. (Read: SEBI Top Brass May Face Stricter Disclosure, Investment and Recusal Rules; Sinha Committee Also Proposes Whistle-blower System and AI-driven Ethics Oversight)
In doing so, the Pratyush Sinha–led committee has also delivered an implicit but damning indictment of how SEBI had been run for 16 years, until allegations of conflict of interest against the previous chairperson exposed the flimsy, unenforceable and legally dubious code that governed the conduct of the chairperson and whole-time members (WTMs) of the market regulator. (SEBI’s Conflict of Interest Code: A Riddle Wrapped in a Mystery inside an Enigma)
It is hard to accept that SEBI’s adoption of a weak conflict-of-interest code in 2008 that arguably violated Sections 29 and 31 of the SEBI Act was merely an oversight. Especially since the regulator never followed it up with a gazette notification, nor did it prescribe penalties for violations.
Nor is it a matter of chance that successive chairmen -- UK Sinha (2011-17), Ajay Tyagi (2017-22), Madhabi Puri Buch (2022-25)—left this sham code untouched for 16 years, even as SEBI was busy imposing ever-stricter disclosure norms and penalties on every other market participant, often on a weekly basis.
During the same period, SEBI repeatedly blocked information sought under the Right to Information (RTI) Act. It also failed to ensure that stock exchanges, which are major market infrastructure institutions (MIIs), essential functioning as public utilities, were brought under the RTI regime. A division bench appeal filed by the National Stock Exchange (NSE), after the Delhi High Court ruled that it must comply with RTI, remains buried in India’s vast backlog of unresolved litigation and the regulator is silent on the issue.
Crucial Revelations
The high level committee affirms what I have repeatedly argued (SEBI Code of Ethics: Set It Right before Getting a New Chairperson)—that the 2008 conflict-of-interest code applicable to SEBI’s senior leadership was significantly weaker than the SEBI (Employees’ Service) Regulations, 2001, which already governed the rest of the organisation for seven years. But the committee goes further and makes even more significant disclosures.
For the first time, the report explicitly notes that SEBI employees are ‘deemed to be insiders’ under SEBI’s insider trading regulations of 2015. This means that, in the event of an insider trading allegation, “The onus is on the employee to prove that he is not guilty of insider trading.” The same standard is not applied to SEBI’s chairperson and WTMs, since they are not categorised as ‘insiders’, despite far greater access to information across the organisation.
The committee also points to another exempt and, hence, privileged group: temporary or contractual personnel. It notes that SEBI’s service rules and code of conduct “does not extend to persons employed temporarily or on contracts, unless otherwise determined by SEBI.” There is no explanation of how or why this exemption was introduced, or how it was implemented.
Further, while the 2008 code imposed almost no trading restrictions on the chairperson and WTMs (barring dealing in securities using unpublished price-sensitive information), other SEBI employees are completely prohibited from investing or speculating in equity, equity-related instruments and commodity derivatives.
This distinction is especially relevant, given the nature of the allegations involving Ms Buch and the opaque manner in which SEBI gave her a clean-chit, repeatedly clearing her of any wrongdoing.
Importance of 2018
The high-level committee’s report makes another important disclosure that warrants closer scrutiny. It notes: “However, the Committee was informed that based on an internal decision, the Chairman and the WTMs voluntarily comply with the restrictions on trading in securities applicable to employees from January 1, 2018.”
Here, again, context matters. This was a period when SEBI was releasing a barrage of consultation papers and rolling out new regulations for intermediaries and market participants, almost every week. So why was the same rigorous approach not applied to overhaul the questionable 2008 code? Who took this so-called ‘internal decision’ on voluntary compliance? Did the chairperson and WTMs decide their own framework based on personal convenience? Was this decision ever placed before the SEBI board or the finance ministry?
More importantly, did anyone examine the weakness of the 2008 code, the lack of parity between the leadership and employees, or the fact that a ‘voluntary’ code is not legally binding and is inherently unenforceable?
If the answer is yes, then it suggests a deliberate and considered decision at the highest level of SEBI to permit the four most powerful individuals in the organisation, with unrestricted access to every investigation, policy move and regulatory action, to remain outside the purview of insider trading rules.
That definition of ‘family’ and post-employment restrictions was narrow for members, broader for employees; the absence of an independent ethics infrastructure to review confidential disclosures; weak and completely non-transparent recusal processes and disclosures; lack of clarity on the whistle-blower process.
It also highlights and fixes the absence of penalties for non-compliance when disciplinary action and penalties are clearly prescribed for employees. Members must disclose interests that could influence Board decisions ‘as viewed by an independent third party’, but definitions are narrow (e.g., family limited to spouse and dependent children under 18.)
In short, the report exposes how SEBI's governance framework lacks rigour, transparency and parity. It recommends a set of corrective measures to put in place a unified, technology-driven, legally enforceable framework that includes comprehensive definitions of conflict including, digital repositories, public transparency, robust and documented recusals, an ethics oversight infrastructure, whistle-blower protection and ongoing compliance monitoring. Implementing these recommendations will require amendments to both—the 2008 code and the 2001 employee service rules.
This is no longer about SEBI and its board. The ball is now in the finance ministry’s court. After 16 years of inadequate oversight, it must recognise the urgency of strengthening the regulator’s institutional integrity, especially at a time when the secondary market is booming and record numbers of retail investors are entering through initial public offers (IPOs) and mutual fund schemes.
The ministry must ensure that SEBI’s board adopts the high-level committee’s recommendations in full, without diluting or cherry-picking. It must also commission an independent inquiry into the ‘internal decision’ of 2018 that allowed senior leadership to adopt stricter rules voluntarily rather than through a binding framework.
SEBI has been a member of the International Organization of Securities Commissions since 1992 and its leadership has been fully exposed to global best practices for decades. It is hard to believe that the decision to retain a weak, unenforceable conflict-of-interest framework and to preserve inequities between the top brass and staff was accidental, or that the latitude it provided was never misused.
Unravelling this opacity is crucial for restoring SEBI's credibility, safeguarding public trust, dispelling perceptions of regulatory capture and ensuring that future leaders don't repeat such complacency. Investors and market intermediaries deserve nothing less from the guardian of their markets.
This is the extreme limit of unfairness and ethical standards - SEBI employees "deemed to be insiders", but not the SEBI Chairperson and WTMs and putting temporary and contractual personnel on the same pedestal as Chairperson and WTMs.
The irony is that no one either from the Finance Ministry or Law Ministry was pro-active in exposing this anomaly. All preferred to be happy ostriches with their heads buried in sand. In so doing we have portrayed our regulator in poor light to the world. This is not nationalism.
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This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
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This is the WORST CASE HOW these Organisation's work for Decades, without people knowing about these shocking facts (cam be Misused)
The irony is that no one either from the Finance Ministry or Law Ministry was pro-active in exposing this anomaly. All preferred to be happy ostriches with their heads buried in sand. In so doing we have portrayed our regulator in poor light to the world. This is not nationalism.