Allegations against chairperson Madhabi Puri Buch highlight deep systemic failures

“SEBI demands high standards of transparency from those it regulates. The same strictures don’t seem to apply to its own leadership, a hypocrisy not lost on market observers. Even more surprising is the National Democratic Alliance (NDA) government’s decision to pretend that it has seen and heard nothing. The government, including the Finance Minister, has buried its heads in the sand. In the process, the powerful SEBI board has been rendered meaningless.”

The integrity of the Securities and Exchange Board of India (SEBI), which regulates the fifth largest capital market in the world, is under intense scrutiny. Revelations involving SEBI chairperson Madhabi Puri Buch are spilling out on a daily basis, raising significant concerns about conflict of interest and inadequate disclosures at the top of this critical institution. In fact, held to the standards of its own orders regarding disclosures by key management persons (KMP) of listed companies and insider trading, it is clear that the chairperson’s transparency is woefully inadequate.

So far, three sets of entities are making these allegations: Hindenburg Research was the first to put out ‘whistleblower’ documents, alleging conflict of interest; the Congress party has held a series of press conferences, making a series of charges and demanding an independent inquiry; and Subhash Chandra Goel, founder of the Zee group and himself under SEBI’s lens, has levied charges of corruption against Buch.

A few things stand out and beg clear answers. They are based on the very standards that SEBI has applied to market participants, financial intermediaries, market infrastructure institutions and listed companies while filing prosecution cases against them or levying serious penalties on them.

The first thing is by Hindenburg Research — about Buch’s failure to recuse herself from the Adani investigation although she and her husband had offshore derivative investments in the same set of nested entities that were under a high-profile investigation of the Adani group, monitored by the Supreme Court. Hindenburg’s second allegation is that she continues to hold a 99% stake in a private advisory entity — which is admittedly being used by her husband since his retirement — and has received income from ‘well-known’ Indian entities.

The Congress first said that during her current employment as a regulator, she earned five times as much as (Rs16.80 crore) she did in ICICI Bank. It turns out that Buch was exercising shares granted to her under the Employee Stock Options Plan (ESOPs). Given that SEBI has handled several regulatory issues pertaining to ICICI Bank, the fact that Buch exercised ESOPs almost every year and benefited from the price rise raises disclosure issues and questions about whether she had access to unpublished price-sensitive information when she exercised her ESOPs. The Congress has also released documents about the renting of her personal property to the associate of a listed entity which has been under SEBI’s investigation.

A separate issue has simultaneously blown up. It pertains to SEBI employees’ discontent over the unprofessional work culture, unreasonable productive expectations and issues relating to perks, housing allowances and compensation. Like the Hindenburg allegations, this was badly handled, leading to a public protest by a few hundred employees, asking the management to withdraw the inaccurate press release which claimed that employees were influenced by ‘misguided external elements.’ The SEBI employees claimed that the management was ‘spreading lies about employees.’

This backdrop sets the stage for a deep dive into how these charges — the lack of adequate disclosures, appropriate recusal and the failure to sufficiently severe her financial ties upon transition to SEBI’s leadership — impact SEBI’s credibility in regulating the capital market and expose the absence of a robust framework to deal with conflict.

In contrast, developed countries which have a revolving door between public and private sectors provide a sharp counterpoint. In the US, regulatory chiefs are required to divest themselves of holdings that could present potential conflicts or place such assets in a blind trust. Such stringent measures ensure that the individuals in public positions as heads of regulatory bodies are free from influences that could compromise their roles. This principle is underscored by the famous Pinochet case, which held that judges should not only avoid actual impropriety but also the appearance of it.

SEBI demands high standards of transparency from those it regulates. The same strictures don’t seem to apply to its own leadership, a hypocrisy not lost on market observers. Even more surprising is the National Democratic Alliance (NDA) government’s decision to pretend that it has seen and heard nothing. The government, including the Finance Minister, has buried its heads in the sand. In the process, the powerful SEBI board has been rendered meaningless. Apart from the chairperson and three whole-time members, the board includes the Secretary, Department of Economic Affairs, the Secretary, Ministry of Economic Affairs, a Deputy Governor of the Reserve Bank of India and an academic, who is the public representative. There was a time, under the United Progressive Alliance (UPA) government, when a joint secretary in charge of capital markets was a SEBI board member and wielded more power than the chairperson. This time around, the SEBI board is behaving like the proverbial three monkeys who ‘see no evil, hear no evil and speak no evil’.

To my mind, their role as members of a regulatory body does not give them that choice. Contrast this with what SEBI expects from boards of listed companies. Over the past two decades, SEBI has repeatedly tightened corporate governance requirements and listed rules casting onerous responsibilities on independent directors in connection with corporate disclosures, price-sensitive information and fiduciary responsibility. Every time these directors fail to question the management, proxy advisory firms are quick to issue sanctimonious missives, highlighting their failure and advising institutional investors on how to respond.

The government members on the SEBI board have an even greater responsibility to ensure that they meet a higher standard of transparency and accountability. By refusing to question the SEBI chairperson or conduct an impartial inquiry and take steps to protect SEBI’s credibility, the SEBI board has clearly failed. This exposes an important loophole in the regulatory system. It shows that there is nothing that stakeholders can do to hold a regulator accountable if the administrative ministry and the government refuse to initiate corrective action. Most people seem to think litigation would also be futile.
(The author, a Padma Shri awardee, is an Indian business journalist and author)