SEBI Regulation: Is Madhabi Puri Buch Getting It Right or Wrong?
The Securities and Exchange Board of India (SEBI) and its chairperson Madhabi Puri Buch have been the subject of several media columns in recent days. As the first private sector person and woman to head the powerful market regulator, she already comes in for extra scrutiny. There is also a consensus of sorts that she works hard, is data-driven, more outspoken than most of her predecessors and would like to be seen as tough but fair.
So, how is she faring so far? I would say it is a mixed bag, which tilts towards the positive because there was already a lot to clean up before her term, even without the big elephant in the room, which is the Adani-Hindenburg (A-H) case in the Supreme court (SC).
Keeping aside the A-H case for the moment, SEBI is actually under the media spotlight, not for the torrent of discussion papers and new regulations that it has been spewing out during her dispensation, but for three tough orders it has issued, which sent a strong deterrent signal to corporate houses and recalcitrant market intermediaries, who have got used to settling serious offenses for paltry sums and carrying on as usual.
Whether SEBI succeeds in maintaining the signal—that it intends to ensure strict compliance—depends on how these orders fare at the securities appellate tribunal (SAT) and eventually the SC. As things stand, these orders have already sent tremors through those under its regulatory ambit and have enthused long-suffering investors. In each case, those rapped by SEBI have rushed to SAT with appeals. Two have succeeded in obtaining a stay order while the third did not. Which are these cases and why are they important?
Brickwork Ratings: On 6th October (SEBI Issues Winding Up Order against Brickwork Ratings), SEBI issued a winding-up order against Brickwork Ratings citing "failure to exercise proper skill, care, and diligence while discharging its duties as a credit rating agency". The order noted repeated lapses found during its inspections. There are plenty of instances where investors have suffered badly because top rating agencies failed in their fiduciary duties and were caught colluding with companies to maintain the highest credit rating (AAA), right until they defaulted. The ratings were then reduced to default grade without the slightest remorse (read: Auditor, Regulator, Rater: Can They Get Away with a Consent Plea?).
Investors who believed in the ratings and lost money—often chunks of their retirement nest egg—may never be fully compensated, even if they recover a part of their investment. These include IL&FS, Altico Capital, Dewan Housing Finance Ltd (DHFL), Cox & Kings, and Reliance Communications (RCom). From their perspective, it was time for a strong deterrent signal. But on 6 June 2023, SAT set aside the SEBI order (SAT Sets Aside SEBI Order Cancelling Brickwork Ratings' Licence) saying that the repeat violations were not deliberate or malafide. It asked SEBI to reconsider the quantum of punishment as well.
SEBI had already challenged an earlier stay by SAT in the apex court so it is unclear if it will file an appeal. After all, SC itself has a poor record of understanding the gravity of fiduciary issues relating to rating agencies as was evident in the CARE Ratings order of 2021 (When Policy-makers and Judiciary Fail To Understand Basics of Regulation and Accountability). At that time, SAT had slashed the Rs1 crore penalty on CARE Ratings, despite multiple failures on its part, to Rs10 lakh. The SC failed to understand the serious consequences of this failure and dismissed SEBI’s special leave petition in the CARE-RCom case. As things stand, it would be foolish of investors to depend on credit ratings, since there is no serious deterrence to their bad faith, collusion, and malpractices. Remember, mutual fund investors have no choice in the matter since mutual funds blindly go by ratings.
IIFL Securities: On 19th June SEBI banned IIFL Securities from on-boarding new clients for two years (IIFL Securities Barred from Taking New Clients for 2 Years) with an order that said, cancellation of the broker’s certificate would be too harsh, indicating that such a serious step had also been contemplated because the broker was a repeat offender. SEBI’s inspection had found that IIFL Securities used funds lying in pool and control accounts for its own purposes, including investment in, and redemptions of, mutual fund units, investment in bonds, metal trust, investment in group entities as well as foreign remittance expenses, among others. Importantly, it failed to classify a set of client accounts correctly.
There have been 32 broker defaults in National Stock Exchange (NSE) since the COVID shutdown, inflicting crippling losses running into several thousand crore rupees. The hall of infamy includes Karvy Stock Broking, once the biggest capital market intermediary with a huge footprint through multiple entities. After the Karvy default, Ms Puri Buch is on record saying that SEBI would permit another Karvy “over our dead bodies.”
One would expect market intermediaries to take this seriously, but the SEBI order mentions repeat offenses on the part of IIFL Securities, with the promise to correct its ways. Typically, the broker rushed to SAT and obtained a stay order (SAT Stays SEBI Order Banning IIFL Securities from On-boarding New Clients for 2 Years), since it had already been penalised Rs2 crore under adjudication proceedings for the same offences. These penalties, as is now so rampant, were also stayed by SAT. Has SEBI shot itself in the foot with repeat punishments for the same offence? We will have a final answer only when all three cases against IIFL Securities slowly wind their way to the SC for a final decision. 
Meanwhile, top brokers who have been repeatedly hauled up by SEBI for misuse of client funds or even luring and misleading clients to trade, appear to have ganged up and launched a media offensive. A news wire report quotes several brokers claiming that the action would lead to turmoil in the industry; they cite innumerable examples of SEBI’s mild and wishy-washy penalties in the past to say such strong action is unwarranted. Each of them is a repeat offender who has got away with paltry payments in the past. One chief executive officer (CEO) is quoted as saying that ‘the industry will collapse if SEBI goes for such black & white judgements’. The brokers forget that Ms Puri Buch herself headed a brokerage firm and is fully aware of what causes turmoil, defaults and serious losses to investors, and what builds investor confidence.
It is worthwhile to remember that broker defaults of the past were a direct result of failing to initiate timely and stringent action, both by exchanges and the regulator (SEBI & NSE Need To Identify Habitual Offenders through Data Analysis and Use Severely Escalated Action as a Deterrent).
ZEE group: The third big action was the unprecedented move of barring the founder and Chairman Emeritus of the Zee-Essel group, Subhash Chandra, and his son Punit Goenka from holding directorships or key managerial positions in any listed entity. This, too, is in line with the intent to send a strong deterrent signal and hurts them more badly than any monetary penalty. (Read: Subhash Chandra: Brilliant Entrepreneurship, Dodgy Business Practices & Nine Lives). In its 12th June order, SEBI had charged Mr Chandra and Mr Goenka of diversion of funds. Although an interim order, it was based on a detailed investigation. The Zee promoters rushed to SAT with an appeal but were unsuccessful. On 10th July, SAT surprised the market by ruling that there was no urgency to grant a stay and asked the industrialists to present their defence to the market regulator in two weeks. It also directed SEBI to pass orders within a week thereafter.
Way Forward
As things stand, SEBI faces three separate but important battles. The first is to get appeal courts to understand the role of deterrent punishment in the capital market and win its cases more convincingly. This brings us to the second issue of dealing with the legacy of its past, where the regulator is indeed guilty of poor investigation, and badly-worded orders, and patchy supervision. Moneylife has reported this extensively over the years, and we have also documented several cases in our book Absolute Power (
Finally, SEBI under Ms Puri Buch will be judged by how it fares in the Supreme Court on the Adani-Hindenburg matter. So far, we are all left guessing. One would have thought that SEBI would have grasped the cop-out offered to it by the SC-appointed expert committee (EC). Remember, the EC has fully exonerated SEBI (Adani Stock Saga: Clean Chit by SC Committee Raises Questions & Creates a Worrying New Template for Investigation) of any regulatory failure. Secondly, it had also signalled to SEBI that any further investigation may be a ‘journey without a destination’.
The regulatory changes which prevented SEBI from ‘lifting the veil’ were before Ms Puri Buch’s time as chairperson, doesn’t matter that she had been a whole-time member since 2017. But SEBI chose not to accept the opening provided by the EC and has filed a fairly combative affidavit that contradicts even the general observations that the committee had on SEBI’s functioning (SC Committee on Hindenburg Saga Flags ‘Onerous’ Disclosures. Uses Questionable Logic To Recommend Dilution of Norms for Corporate India).
It has strongly refuted the EC’s suggestion that the dilution of 2019 rules dropping the ‘opaque structures’ clause would make it difficult to trace the ultimate beneficial ownership of key foreign portfolio investors identified by Hindenburg Research and others.
Since the SC did not respond to the affidavit seeking directions on the EC report, nor has it given the regulator additional time for its investigation, the clock is ticking for SEBI and one would expect it to have clear answers by 14th August.
If SEBI goes back to the Court seeking more time and with nothing new to show, it will seriously dent the regulator’s reputation. On the other hand, if it backs up the affidavit’s aggressive claims of having all the powers, rules, and systems in place, and comes up with some serious findings, then Ms Puri Buch may be in line to be considered the toughest chairperson that SEBI has had since the late GV Ramakrishna—who gave it a phenomenal start.
9 months ago
As far as I'm concerned, SEBI's reputation is dented beyond repair, starting from CB Bhave's tenure onwards. I had great expectations from Ms Puri Buch considering she is from private sector, but I'm afraid nothing has changed. Zilch.

Seems that public service is a whole different ball game, and they have no skin in the game. It's a lot easier to sit in the ivory tower and act tough. Some of the regulations are just onerous and stupid, especially with regards to fiduciaries that isn't even worth debating, although she inherited a mess from her predecessor, Ajay Tyagi.

I suppose she has other problems and priorities, and she's choosing her battles, for whatever reasons.

May the better legal team win!
9 months ago
After C.B. Bhave, Ms. Buch has been a tough regulator at SEBI and she is making all the right moves. Unfortunately, the all-powerful broker lobby has ganged up against her and SEBI. As rightly observed by the author, appellate bodies have taken a soft approach to brokers' misdemeanors on the specious ground of legacy orders by SEBI. One only hopes that Supreme Court takes a realistic view of the matter.
9 months ago
Right or wrong she is making the right noises. It is sad that SAT and SC are negating her good intentions. Investors as usual are left in the lurch and these cronies continue to have a field day.
Kamal Garg
Replied to pallavoorsubramanian comment 9 months ago
Yes, I agree. Someone has to start from somewhere.
9 months ago
Thanks for explaining the issues clearly and backing tough actions by SEBI
Free Helpline
Legal Credit