The allegations against the SEBI chief are examined here from the framework of the law of the land, and applicable rules in an institution only, vis-à-vis the perfectly legitimate conduct of private sector managers when in their private roles, and the implications when they take on public service.
There have been a series of events and a flurry of allegations from an entire international ecosystem consisting of high finance, political parties, corporates, NGOs, media, influencers and battery of lawyers on the current SEBI chief, Madhabi Puri Buch. The allegations raise serious concerns in the minds of private sector managers undertaking roles in the public sector. The allegations are examined here from the framework of the law of the land, and applicable rules in an institution only, vis-à-vis the perfectly legitimate conduct of private sector managers when in their private roles, and the implications when they take on public service.
STRUCTURE OF SEBI
The organization has a Board headed by the Chairperson, and has four whole-time members, and three ex-officio part-time members, the Secretary (Finance), Dep Governor (RBI), and Secretary (MCA). Matters concerned with the Chairperson are evaluated by the Board.
SEBI CODE OF CONDUCT (COC) & THE ALLEGATIONS
The laws of the nation and the CoC of the institution are the foundation and frameworks on which the allegations need to be examined. Financial institutions have well defined processes and offices to which such disclosures have to be made. Anyone making allegations, or believing them without due diligence, need only visit the website of SEBI for the details.
a) Confidentiality: Information disclosed by a Board member under the CoC is to be kept confidential by SEBI, i.e., it is not to be made public, unless required for managing conflicts, disciplinary proceedings, or for legal or regulatory reasons. Privacy after all is a fundamental right for everyone. Any demand, therefore, that disclosures be made in the public domain for a lifetime of private employment or business activities is misplaced without something equivalent to a court order. An employee of the government makes such disclosures to the government or equivalent from the day of employment with the government. There is again no requirement that every bureaucrat disclose to the public all their disclosures. Activities like investments or membership in boards anytime in the 5 years preceding appointment to the SEBI Board are to be disclosed under the CoC.
b) Outside Private Activities: (i) Members are not allowed to hold any other office of profit or engage in professional activities that result in salary or professional fees. “Office of profit” has specific meanings in the Constitution or in various rules. Note that being a shareholder in an entity, including a commercial enterprise like a consulting firm mentioned in allegations is not the same as holding an office of profit or a professional activity giving salaries or fees. SEBI Board members are not prohibited from owning shares in business organizations. Anything not in the rules is a personal opinion, and a person cannot be held liable because someone else has a personal opinion. Unlike bureaucrats, private sector managers will have had many dealings with commercial entities in their careers.
(ii) Several allegations have dragged in the business activities of the spouse of Ms Buch. Note that the CoC does not require that the spouse or any other relation of a Board member must give up their chosen jobs, assignments or careers. It is pertinent to ask if such family members of past heads of SEBI were asked to disclose and give up their career activities. If not, why should the current matter be treated differently?
(iii) Note that only disclosures are required for any significant personal or financial relationships with an entity regulated by SEBI. Such relationships are not prohibited. Again, it would be pertinent to ask if past SEBI heads or their relatives gave up or stopped all such private activities and/or investments in an entity regulated by SEBI, and why an exception is being demanded in this case.
c) Transactions in Shares: Board members must disclose their and their family’s (spouse, children under 18) shareholdings within 15 days of assuming office. Note that disclosure is through the standing procedure. There are also time-limits and thresholds of value specified for recurring disclosures. All that SEBI needs to do here is to state that such disclosures have been made satisfying the provisions in the current matter.
d) Time Period: Members must disclose any post or fiduciary positions held in the last five years with a regulated entity. There are two implications. Since Ms Buch became a member first, she would need to disclose to SEBI any such position. However, it needs to be a position in an entity regulated by SEBI. For example, a position in a private listed company in the USA or Singapore will not fall under this requirement. Again, all SEBI needs to do is to make a statement that disclosures satisfying these requirements have been made internally.
e) Conflict of Interest (CoI): Potential CoI must be disclosed at the earliest possible opportunity. If the Chairperson has doubts about their own conflict of interest, they must seek the Board’s determination. If a conflict of interest is likely, the member must refrain from participating in the matter. By and large in most such situations the CoI is either absent or is obvious, and elaborate determinations are not needed. Members are strictly prohibited from hearing or deciding on matters where they have a conflict of interest. Therefore, the question to be answered is if any situation was clearly within the definition of CoI, either as defined or as determined by the SEBI Board, and the steps taken by the Board if needed. Note that in several areas only disclosure is required, that too within SEBI, and not approval. A manager from the private sector will have had a history of relationships with various entities during their career.
f) Past Investments: The allegation that investment by Ms Buch in an overseas investment fund in 2016 and that too exited in 2018 represents a CoI situation a few years later from 2022 onwards in the Hindenburg-Adani saga, does not hold. Such small investors individually have very limited authority in the investment decisions, like individual unit-holders in a small mutual fund. Details of dealing with one investor are not shared with other investors. In any case the said fund did not invest in Adani. Fund managers run a number of funds concurrently, and the set of investors in such sub-funds may be different, somewhat similar to having an account in a bank while other people also have their own accounts. Investing in funds run by personal or professional acquaintances is quite common. If the investment fell within the previous 5-year window, a disclosure within SEBI is adequate.
g) Irregular post-retiral pay-outs: Similarly, it appears that the exercise of ESOPs in the previous employer was permissible by the rules of that employer & SEBI. Irregularity of post-retirement benefits are easily explained by the applicable ESOP rules, and the former employer has already done so.
JUDICIAL REVIEW
The Lokpal has now rejected a set of complaints under the prevention of corruption act, with comments which are almost a rebuke of the complainant. That should settle the matter, but will probably not do so. Earlier also the Hon Supreme Court had set up a committee chaired by a retired judge to examine the Hindenburg-Adani matter. The committee did not find any serious gaps, and made some constructive suggestions. Subsequently, the court expressed satisfaction at the investigation conducted by SEBI, which is continuing. This background has been omitted in the discussions in the media on the allegations. Incidentally, the initial time period set by the court to complete the investigation was generally considered inadequate by market participants. The US SEC also takes 12-18 months to complete investigations.
STAFF ISSUES & COMMUNICATION
SEBI has seen protests by several employees on various matters. A hard driving, result oriented private sector management style needs to be aligned with the rules-based government sector. Organizations can have differences between labour/staff and management and they will be sorted out in due course. SEBI has not done a good enough job in its communications, which needed to be more timely, detailed with explanations based on its rules, clear on what is expected of its Board members, and that its expectations have been made. Judges, Generals, Economists and Regulators should speak less, and that too very carefully. However, those are not a part of this article.
THE BROADER IMPACT
The private sector has several high-quality individuals who have had trajectories different from the typical government employee. It is disconcerting to see professionals used as scapegoats by entities pursuing their political and other interests. It makes private sector managers think multiple times before taking jobs that involve nation-building in the public sector. Those already in positions of responsibility may hesitate or overthink before making decisions which could affect different interest groups. The system needs to learn from developed countries like the United States in the matter of benefiting from private sector competencies.
The author is an Advisor with A-Joshi Strategy Consultants Pvt Ltd. Views are personal.