Who Will Hold SEBI Accountable? The Legal Void in India’s Market Infrastructure
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. 
 
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. 
 
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
It is not as if the Conflict Code has remained mothballed for 16 years and its lack of legal competence was an oversight. These service conditions were revisited and amended in March 2018 (https://upload.indiacode.nic.in/showfile?actid=AC_CEN_2_11_00014_199215_15178073 19932&type=rule&filename=SEBI%20 (Terms%20and%20Conditions% 20of%20Service%20of%20Chairman %20and%20Members)%20Rules,%201992.pdf ). 
 
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? 
 
Comments
balakrishnanr
4 weeks ago
Perhaps, the one solution would be to have a CEO who is NOT on the Board of Directors. Give whatever powers. And have on the Board at least a couple of well known names who are seen to be independent. Here, the Board is toothless and the CEO can get away with whatever he/she does. After all, the Board will know only what the CEO wants them to know. Even the Finance Ministry (supposedly knowing everything) is quiet and far removed. Do not think anything will change.
dunbaka
1 month ago
Looks like SEBI and Buch are partners in crime.
viks.gyl
1 month ago
SEBI is not doing it's duty properly. It's duty is to protect investors as regulator. Stocks with no fundamentals are moving and SEBI has closed it's eyes colluding with operators.
dunbaka
Replied to viks.gyl comment 1 month ago
Chor SEBI.
amit_kumar
1 month ago
When they have to protect someone, along will come some "legal void". In reality, it is just a matter of who has to be protected.
prasanna
1 month ago
Sucheta madam. Nation First. Protect Investors. Curb your journalist instincts. Do not wash SEBI's dirty linen in public domain. If Hon'ble Finance Minister is not paying serious attention to the issues of SEBI's and NSE's indiscretions, go to the Hon'ble Prime Minister and explain the larger concerns to him. But remember, your actions in public are only helping vested anti India interests whichyou probably have not considered. Freedmon of speech comes with immense responsiblity.
dunbaka
Replied to prasanna comment 1 month ago
Don't try to cover-up the criminals.
MLD
Replied to prasanna comment 1 month ago
Your attitude is what has kept our country backward after 77 years of independence. You concern about Nation First is perhaps 10 years old -- starting 2014. I have been exposing wrongdoing and holding EVERY ruling government accountable, since I came into journalism around 2984 -- maybe long before. you were born. So maybe you and Ms Mankodi (regular troll) will desist or avoid this website altogether. There is no compulsion to be here.
Pragna Mankodi
Replied to prasanna comment 1 month ago
I fully endorse your views in the matter. Investigative journalism is more than just reporting and making allegations on the basis of some unsubstantiated reports.
Sudeep1
1 month ago
Our Justice system is broken.The Courts in India especially Under the Constitution suffer from incompetence,nepotism,corrupt and incompetence.To hold Ms.Buch accountable PAC is not right forum,they cannot take disciplinary action.Court can definitely ask for investigation and discipline SEBI,as Government is keeping quiet.One representation to Centre seeking compliance of disclosure requirements and wait for 15 days if nothing happens Writ can be filed in Bombay HC,Money Life can take this initiative.I as a subscriber am willing to contribute towards litigation expenses.
bookjohn1984
1 month ago
Clearly, Buch had something to hide, why else would she dodge an appearance before the PAC? If she was confident, she should and could have gone there with her head held high and given straight answers. The fact that she did not turn up itself is her own admission of her guilt and culpability.
abhay1955
Replied to bookjohn1984 comment 1 month ago
Agree. It could have been doodh kaa doodh, paani kaa paani in that case.
rvaidyanath
1 month ago
It is such a shame that colo scam one of the biggest in history is not at all investigated and pushed under the carpet Why is Pawan Khera not investigating that is an open secret as Skelton from his party will be in the open.

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
sharmajiindia
1 month ago
The height of COLONIAL HANGOVER TOO BIG. How come a WHITE MAN is always RIGHT and rest of THE COLORED EVERY TIME WRONG. Does the HINDERBERG landed from HEAVENS that every word of them is GOSPEL TRUTH. For GOD sake come out of that COLONIAL MINDSET. Please revisit US-64 issue in late Nineties.
amit_kumar
Replied to sharmajiindia comment 1 month ago
Indian journalism has been co-opted by dough, ads, threats and prison. India is going down the drain if the present state of lawlessness persists for a few more years.
Meenal Mamdani
1 month ago
The only thing that might shake up the govt is Foreign Institutional Investors.
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.
parimalshah1
1 month ago
We know when INC was in power it passed many good laws, but always kept some loopholes to benefit from those. Why in BJP now not sealing those loopholes, or if necessary, rewrite the laws to make control more stringent.
vaibhavdhoka
1 month ago
It is absolutely true that in India regulators and judiciary has immense power to regulate the bodies they are supposed to regulate. But instead of doing duties in true words and spirit many seniors take their appointment casually. They utilise power for their own benefit and richness. They only see regulations are executed in unorganised members of bodies. I am a IFA,my membership was due for renewal and due to unavoidable circumstances my renewal was delayed by 18 days and my brokerage in this period was not paid to the tune of ?14000.When complaint was filed routine reply it is as per regulation and guideline.What happens to regulations and guidelines when higherup are involved .In India they are like kings who could not be answered.
SEBI’s Conflict of Interest Code: A Riddle Wrapped in a Mystery inside an Enigma
Sucheta Dalal, 25 October 2024
On 24th October, the public accounts committee (PAC) of Parliament is scheduled to meet officials of the finance ministry, regulators and tax departments and the Securities & Exchange Board of India (SEBI). The multi-party PAC, headed...
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