The scandal involving the chairman of Swiss National Bank and his consequent resignation brings to the focus the need to formulate appropriate guidelines on insider trading, corporate governance standards, conflict of interest, etc. for all the regulators in India and this should be taken up on priority by India’s Financial Stability & Development Council in the interest of improving the credibility of these institutions

The resignation, forced or otherwise, of Philipp Hildebrand, chairman of the Swiss National Bank (SNB) from his post on 9 January 2012 over allegations relating to a suspicious currency transaction made by his wife during last year is a concrete case of how things can turn out for people at high offices, when their family members, whether knowingly or unknowingly, enter into transactions which have a semblance of insider trading. Mr Hildebrand claims to have had no knowledge of the transactions entered into by his wife, but was forced to resign because of mounting political pressures. He, however, reportedly said that he resigned because it was “not possible to provide conclusive and final evidence” to prove that his wife traded without his knowledge.  

The SNB, the central bank of Switzerland, in its press note released on 9 January 2012 made a crypt statement that based on the events and findings of past few days, their chairman had decided to resign in order to protect the institution and that the Bank’s Council accepted the same and thanked him for his outstanding achievement in the field of monetary policy, and for his enormous dedication in the service of both the Swiss National Bank and Switzerland. 

SNB on 4 January 2012 published a report about private currency dealings of its chairman, Philipp Hildebrand, amidst allegations that he had profited from inside information.  The report of PricewaterhouseCoopers, (PwC) which was engaged by SNB to investigate into the matter, revealed the following:

1. During 2011, a year in which the Swiss franc rose sharply and then fell following an intervention by the SNB, the Hildebrands entered into a series of foreign exchange transactions as detailed below.
2. On 10 March 2011 the Hildebrands sold 1.1 million Swiss francs and purchased US dollars out of the cash got from a property sale made by them earlier.
3. On 15 August 2011, Kashya Hildebrand, a US citizen of Pakistani origin,  sold additional 400,000 Swiss francs and bought US dollars, as she, a former hedge fund manager herself, reportedly  wanted to hold 50% of her family’s liquid funds in US dollars. As per the bank’s report, the chairman did not know about the transaction until the following day, when he immediately reported it to the bank.  
4. On 6 September 2011 the chairman of SNB said to have announced that the Swiss National Bank would cap the value of the Swiss franc against the euro, thus forcing a de facto depreciation of the franc against all other major currencies. This resulted in the value of his wife’s investment improving by almost 20%. 
5. On 4 October 2011, the Hildebrands sold US dollars for 475,000 Swiss francs, to enable them finance a property purchase.
6. All these forex deals, as per the media reports, resulted in the couple making a profit of approximately, 65000 Swiss francs (equivalent of about Rs35 lakh)
7. An investigation by PwC has concluded that Mr Hildebrand did not breach the central bank’s insider-trading rules. As per the media report, the PwC statement said that because the money was converted to buy a property, and not to invest in financial products, it was within the bank’s rules on currency exchanges. It further said that the larger transfer, made in March, also fell within the rules as it was not used for six months and was considered a passive investment. 
8. PwC was called only in mid-December, when Mr Hildebrand became aware of rumours about his wife’s dealings. And the SNB only published PwC’s report after Sarasin & Co, the Swiss private bank, announced on 3 January 2012 that one of its information technology employees had illegally passed bank data about Hildebrands’ personal finances to a lawyer connected to the right-wing Swiss People’s Party.
9. From then onwards, it became a political issue which forced the chairman to resign on 9 January 2012. And the employee of the Swiss private bank who had leaked this information was also sacked by his employer for stealing the confidential information and passing it on to outsiders.  
10. The Roman Emperor Julius Caesar had reportedly responded to baseless allegations of adultery against his wife by divorcing her, saying “Ceasar’s wife must be above suspicion”. But here Mr Hildebrand reportedly donated the profits that his wife made on these transactions to charity probably to prove his innocence.  

That is so far as Swiss National Bank and Swiss banking rules are concerned and the recent scandal revolving around them. But what about the position obtaining in India in respect of our own regulators and their senior managements are concerned?

The insider trading in stock market is regulated in India by Securities and Exchange Board of India (SEBI) under the SEBI (Prohibition of Insider Trading) Regulations 1992 and amended on 19 November 2008. These rules apply to all listed companies and each listed company is expected to formulate its own rules for its staff on the basis of model rules framed there under. One of the rules under the aforesaid SEBI regulations reads as under:

“All directors /officers/designated employees who buy or sell any number of shares of the company shall not enter into an opposite transactions i.e. sell or buy any number of shares during the next six months following the prior transaction.”

Obviously this six months rule may have been borrowed from the international practice, as PwC, too, has given a clean chit to the SNB chairman based on this six months rule. 

These rules are applicable to all listed companies. But surprisingly nowhere it is mentioned that these rules are equally applicable to the officials of the regulators and their board members. 

However, SEBI has put on its website “Code on Conflict of interest for Members of Board” adopted on 4 December 2008 to ensure that it conducts in a manner that does not compromise its ability to accomplish its mandate or undermine the public confidence in the ability of members(s) to discharge his responsibilities. It also stipulates that a member shall not deal in securities of a company listed on a recognized stock exchange based on unpublished price sensitive information which he may have got access to.  

The Reserve Bank of India’s (RBI) website is silent in this regard and does not give out any details of the rules and regulations applicable to its directors and the senior management of the bank with regard to insider trading either in shares or in foreign exchange. RBI will definitely have its internal rules applicable to its staff but unfortunately, this is not put in public domain. In many cases, it appears that the rules applicable to banks are not made applicable to the RBI, as it is not a listed bank. For instance, all banks have to have a policy on “protected disclosure scheme”, but whether a similar scheme exists for RBI is not known, as it is not published on its website. 

Surprisingly, corporate governance regulations applicable to all listed companies under Clause 49 of the Listing Agreement are also not applicable to the regulators, even to the extent relevant to them, as they are not listed companies. The regulators are more sacred than the regulated entities. Should they, therefore, not have appropriate governance guidelines which should lay down all these sensitive issues like insider trading, conflict of interest, protected disclosure norms, etc, to ensure their credibility among the public? 

As the saying goes, “what’s sauce for goose is also sauce for the gander”. But this does not appear to be applicable to our regulators as rightly pointed out by Sucheta Dalal in her article “Regulators: Holier than thou” (Moneylife Digital newsletter dated 23 January 2012).  There are a number of regulators in our country, which have enormous powers to move the markets and they make statements to the electronic media almost everyday without bothering about their consequences.

It is, therefore, necessary and expedient for the newly formed India’s Financial Stability & Development Council (FSDC) to look into this aspect and codify a set of regulations applicable to all regulators and their senior management not only in respect of insider trading in stocks, shares, securities, commodities and foreign exchange, but also with regard to the conflict of interest, corporate governance standards, etc, drawing from the example of Swiss National Bank, which has since put up a revised code for its board members and senior management in the wake of the scandal involving its chairman. 

Source: References:

www.breakingviews.com

BBC News, Reuters, Bloomberg. 

Financial Times

(The author is a financial consultant and he writes for Moneylife under a pen-name ‘Gurpur’)