After staunchly defending Madhabi Puri Buch, chairperson of the Securities & Exchange Board of India (SEBI), to the extent that its board and the finance ministry refused to even examine charges against her or call for an explanation, the government has now advertised for applications for the post.
Media speculation suggests that this signals the end of her tenure. However, such conclusions may be premature. In the past, under various political regimes, the final appointee has not always been on the final shortlist. Remember, the United Progressive Alliance (UPA), in a last-minute twist, appointed CB Bhave as the SEBI chairperson with special ring-fence since SEBI was investigating the National Securities Depository Ltd (NSDL) which he headed. Mr Bhave had previously declared that he did not wish to be considered for the post. It was during his controversial tenure that SEBI framed a legally questionable ‘Code of Ethics’ for its board members, including whole-time members (WTMs).
Ms Buch could still be in the running for an extension but for two significant hurdles with large political ramifications. Firstly, she may have dodged a summons from the public accounts committee (PAC) of Parliament, headed by KC Venugopal of Congress in October 2024, but an extension will surely reactivate it leading to more political embarrassment as the government struggles to keep defending her.
Secondly, Mahua Moitra, member of Parliament (MP) from the Trinamool Congress and others have filed complaints against her with the Lok Pal, alleging improper conduct and quid pro quo arrangements under the Prevention of Corruption Act. The complaints are based on allegations made by Hindenburg Research and the Congress Party. The Lok Pal investigation is ongoing, with the next hearing set for 28th February—the day Ms Buch’s tenure ends—leaving the issue unresolved .
Code of Ethics: The Elephant in the Room
The question then is whether SEBI’s new chairperson will continue to share office with the big elephant in the room— SEBI’s dodgy code of ethics? It is one thing for the government to steamroll the Opposition by refusing to even examine the charges against Ms Buch, but leaving this issue unaddressed while appointing a new chairperson would reflect poorly on the government's commitment to transparency and ethics. It also impacts SEBI’s credibility as the market watchdog.
This flimsy Code of Avoiding Conflict of Interest (Conflict Code) was cobbled together in 2008 at the instance of Prof Mohan Gopal, a legal luminary and former member of the SEBI board who had an extraordinarily tumultuous tenure (Dr Mohan Gopal’s explosive exposé of SEBI’s functioning under Bhave).
The conflict code, which was voluntarily adopted by the board, is applicable only to the SEBI chairperson, WTMs and board members, and is much weaker than the rules applicable to SEBI employees to the level of executive directors (ED). It has remained untouched for 16 years, even as the regulator came up with thousands of new rules, regulations and disclosures for all market participants and intermediaries, over the years.
Moreover, the code itself is illegal. Sections 29 and 31 of the SEBI Act require that any ‘rules’ framed by the regulator must be published in the official gazette and approved by Parliament. This was not done for 16 years. There is a view that a ‘code’ is not a rule or a regulation and, hence, does not need government clearance, because finance ministry representatives on the SEBI board had cleared the resolution adopted by the board.
If so, there is another problem. Advocate Murali Neelkantan points out that that SEBI’s code itself says: “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.” These service rules are far more stringent than SEBI’s code, which means that the SEBI board is only embarrassing by refusing to investigate conflict of interest and claiming that the chairperson adhered to its conflict code of 2008. Read: Who Will Hold SEBI Accountable? The Legal Void in India’s Market Infrastructure
The present controversy underscores the fact that when private individuals, who opt to serve the nation in a regulatory capacity, must be willing to be subject to transparency, stricter disclosures and restrictions in their financial dealings. There is also a need for clear disclosure process with regard to employee stock options (ESOPs), rental and consultancy income, covered by enforceable rules. Reasons for recusal from issues, both internally and at board meetings, need to be clearly disclosed and documented. It turns out that SEBI rules already provide for this’ but it is not clear whether the rules followed. In response to my queries, Prof Mohan Gopal made two important points.
First, the overarching nature of Section 32 of the SEBI Act which states that its provisions are ‘in addition to other laws in force. Secondly, Rule 3(1) of the SEBI (Terms and Conditions of Service of Chairman and Members) Rules is clear that the chairperson and WTMs will not have “any such financial or other interests as are likely to affect prejudicially his functions as such Chairman or Member.” This also applies to part-time board directors who are, often, political appointees.
Regulation 9 of the SEBI (Procedure for Board Meetings) Regulations of 2001 requires all board members to disclose the ‘nature of their interest in issues that come up for discussion’, moreover this needs to be “recorded in the proceedings.” It means that a mere recusal is not enough’ the reasons need to be documented and can be examined by the Lok Pal, if it calls for information from SEBI.
Dr Mohan Gopal also pointed out that unlike the Reserve Bank of India (RBI), SEBI WTMs not only have managerial and executive authority (which are subject to board oversight), but also have votes on the board which allows them to influence decisions. In contrast deputy governors and government nominees on the RBI board do not have voting rights. He says that the 2008 Code was broadly based on the recommendations of “Working Group on Conflicts of Interest in the Indian Financial Services Sector” set up in 2004-05. The working group had pushed for ‘principles-based regulation over rule-based one’; but the world has since moved away from this approach in favour of detailed enforceable rules.
Dr Gopal is emphatic that the 2008 Conflict Code was “never meant to offer safe haven or refuge to any member or Chairperson from being held accountable, or to avoid or dilute the application of other applicable laws, rules or regulations. They should not be put to such use.” In his view, the Conflict Code needed to be supplemented with detailed, enforceable rules.
So where do we go from here? The solution is straight-forward: Since the Conflict Code of 2008 wasn’t formally approved or gazetted, the finance ministry can simply direct SEBI to scrap it. If needed, a new working group can be set up to draft a Code, with clear enforceable rules which accommodates issues peculiar to lateral entrants from the private sector. Until then, the more stringent government of India regulations must apply to the new chairperson.
Comments
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I wonder if we have an organisation in India, similar to the Office of Government Ethics, which directs policies relating to prevention of Conflict of interests in the Federal Govt. This can frame Umbrella rules for all the Govt employees and public organisations including PSU, various watch dogs etc. Individual organisations can frame rules more stringent as required not dilute them.
SEBI is the rogue elephant. Those in power, take care of their own. They will never let themselves be handicapped by law. And there is an arrogance that is "do what you can, I do what I want. No one can touch me" that seems to go with the appointment. Any integrity is voluntary. And given that appointments are done to favour someone or go after someone, it is not voluntary, but optional. I have no hope that we will ever get a SEBI that is honest and capable.
The finance ministry wants a compliant regulator so that they can bend the institution to its will. The present GoI has been particularly brazen in breaking rules and protecting crony capitalists but I will not be surprised to learn that INC did the same when they were in power but on a smaller scale.
India needs to reform its laws and justice system if it wants to have a democratic nation that respects rule of law.
We have ridiculous laws that allow anyone to claim injury to their feelings or psyche caused by speech which is then deemed detrimental to the particular community or sect or whatever.
Our laws allow a person to be imprisoned on suspicion of a crime for months and even years while the investigating authorities slowly collect evidence. It is obvious that the process of investigation is the punishment.
I am afraid that this will continue until the middle class organizes into specific bodies devoted to transport, education, medical care, etc and monitors the activities of the responsible govt authorities.
The politicians are least interested in judicial reform because they benefit from the current arrangement.
At a time when the Securities and Exchange Board of India (SEBI) has itself come under a cloud, an ex-parte order, issued on 2nd January against Ketan Parekh (KP) and 21 associates, makes for fascinating reading.
Many of us missed this 22nd November report, where the securities appellate tribunal (SAT), once again, imposed a penalty of Rs1 lakh on the Securities & Exchange Board of India (SEBI) for passing a ‘mechanical order’ against Ms SRBC...
Shaktikanta Das, the 25th Governor of the Reserve Bank of India (RBI), demitted office on Monday, leaving an impressive legacy of navigating several crises during his six-year tenure. Taking charge after his predecessor Urjit Patel’s...
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The finance ministry wants a compliant regulator so that they can bend the institution to its will. The present GoI has been particularly brazen in breaking rules and protecting crony capitalists but I will not be surprised to learn that INC did the same when they were in power but on a smaller scale.
India needs to reform its laws and justice system if it wants to have a democratic nation that respects rule of law.
We have ridiculous laws that allow anyone to claim injury to their feelings or psyche caused by speech which is then deemed detrimental to the particular community or sect or whatever.
Our laws allow a person to be imprisoned on suspicion of a crime for months and even years while the investigating authorities slowly collect evidence. It is obvious that the process of investigation is the punishment.
I am afraid that this will continue until the middle class organizes into specific bodies devoted to transport, education, medical care, etc and monitors the activities of the responsible govt authorities.
The politicians are least interested in judicial reform because they benefit from the current arrangement.